Rules & Recommendations on the Number of Independent Directors in Asia

Transcription

1 Compiled by: Rules & Recommendations on the Number of Independent Directors in Asia Asian Corporate Governance Association (ACGA) Hong Kong July CHINA At least one third of the board. Recommendation: There is no official recommendation for more. 1. Company Law (2005) Section 5: Special Provisions on the Organizational Structure of Listed Companies Article 123: A listed company shall have independent directors. The specific method of appointing such independent directors shall be formulated by the State Council. 2. Code of Corporate Governance for Listed Companies in China (2002) Chapter 3: Directors and Board of Directors (5) Independent Directors 49. A listed company shall introduce independent directors to its board of directors in accordance with relevant regulations. 3. China Guidelines on Independent Directors (2001) Each board should have at least two independent directors by June 30, At least one third of the board should be independent by June 30, ACGA Ltd, 2010 Page 1 12/21/2011

2 HONG KONG At least three independent directors. Recommendation: At least one third of the board. 1. Stock Exchange of Hong Kong, Listing Rules, Chapter 3 Clause 3.10 (1) Every board of directors of a listed issuer must include at least three independent non-executive directors; and (2) At least one of the independent non-executive directors must have appropriate professional qualifications or accounting or related financial management expertise. Note: With regard to appropriate accounting or related financial management expertise, the Exchange would expect the person to have, through experience as a public accountant or auditor or as a chief financial officer, controller or principal accounting officer of a public company or through performance of similar functions, experience with internal controls and in preparing or auditing comparable financial statements or experience reviewing or analysing audited financial statements of public companies. 2. Code on Corporate Governance Practices (2004) Recommended Best Practices A.3.2 An issuer should appoint independent non-executive directors representing at least one-third of the board. (Note: In Hong Kong, listed companies do not have to comply with recommended best practices or explain why they do not. They are only advisory.) Guideline on Corporate Governance of Locally Incorporated Institutions (2000) The Hong Kong Monetary Authority (HKMA) imposed stricter standards of board independence on banks before the Stock Exchange followed suit for all listed companies: 9.2 In order to provide a sufficient pool of independent directors for this purpose, the MA considers that the board of directors of banks should include at least three independent non-executive directors. It is recognised that some banks may not be able to meet this requirement immediately, but they should do so by end-june ACGA Ltd, 2010 Page 2 12/21/2011

3 INDIA At least one-third of board directors should be independent if the chairman is a non-executive director. If he or she is an executive chairman, or a non-executive chairman linked to the promoter (ie, controlling shareholder), then 50% of the directors should be independent. Recommendation: There is no official recommendation for a higher proportion. However, the rule outlined above is based on a mandatory recommendation from the Indian Code of Corporate Governance, published in Securities and Exchange Board of India, Listing Agreement, Clause 49 I. Board of Directors (A) Composition of Board (i) The Board of directors of the company shall have an optimum combination of executive and non-executive directors, with not less than fifty percent of the board of directors comprising non-executive directors. (ii) Where the Chairman of the Board is a non-executive director, at least onethird of the Board should comprise independent directors and in case he is an executive director, at least half of the Board should comprise independent directors. Provided that where the non-executive Chairman is a promoter of the company or is related to any promoter or person occupying management positions at the Board level or at one level below the Board, at least one-half of the Board of the company shall consist of independent directors. 2. Indian Code of Corporate Governance (1999) Independent directors and the definition of independence The Committee recommends that the board of a company have an optimum combination of executive and non-executive directors with fifty percent of the board comprising non-executive directors. The number of independent directors would depend on the nature of the chairman of the board. In the case of a nonexecutive chairman, at least one-third of the board should comprise independent directors and in case of an executive chairman, at least half of board should be independent. This is a mandatory recommendation. ACGA Ltd, 2010 Page 3 12/21/2011

4 INDONESIA A) The board of commissioners* of a newly listed company must have at least 30% independent commissioners. The board of directors* must have at least one unaffiliated director. B) The number of independent commissioners must be in proportion to the number of shares owned by noncontrolling shareholders, but at least 30%. Recommendation: There is no official recommendation for a higher proportion. The Indonesian Code of Good Corporate Governance (2006) talks about independence in terms of general principles, not number. * Note: Indonesia has a two-tier board system, with the board of commissioners (komisaris) supervising the board of directors (direksi). The definition of independent commissioner is similar to that of independent director in single-tier board systems; however, the definition of unaffiliated director is considerably weaker. 1. Indonesia Stock Exchange (2004) formerly called Jakarta Stock Exchange Listing Requirements III.1. The Prospective Listed Company intending to list its shares either at the Main Board or at the Development Board must fulfill the following requirements: III.1.4. Having Independent Commissioners at least 30% (thirty percent) of the composition of the Board of Commissioners who can be firstly appointed in General Meeting of Shareholders held prior to Listing and shall be effective after the shares of the company are listed. III.1.5. Having at least 1 (one) unaffiliated Director in the composition of the Board of Directors who can be firstly appointed in General Meeting of Shareholders held prior to Listing and shall be effective after the shares of the company are listed. 2. Indonesia Stock Exchange (2004) Securities Listing Rule Number I-A Concerning the General Provisions of the Listing of Shares (July 2004) C.1. In relation to the implementation of good corporate governance, a Listed Company must have the following: (continued over) ACGA Ltd, 2010 Page 4 12/21/2011

5 a. The number of Independent Commissioners which is in proportion to the total number of shares owned by the non-controlling shareholders, provided that the number of Independent Commissioners shall comprise at least 30% (thirty percent) of the total members of the board of commissioners; Bank Indonesia: Implementation of Good Corporate Governance for Commercial Banks (2006) This regulation sets a higher bar for independence in bank boards of commissioners although the cooling-off period referred to below is extremely short and probably counterproductive. Article 5 (1) The Board of Commissioners shall consist of Commissioners and Independent Commissioners. (2) No less than 50% (fifty percent) of the number of the Board of Commissioners members shall be Independent Commissioners. (3) Former members of the Board of Directors or Executive Officers or parties closely related to banks capable of exercising influence in acting independently can only be Independent Commissioners to the Bank after completing a cooling off period of 1 (one) year. (4) The provision as referred to in paragraph (3) is not valid for Former Board of Directors or Executive Officers performing supervisory function. ACGA Ltd, 2010 Page 5 12/21/2011

6 JAPAN At least one independent director or one independent statutory auditor. Recommendation: There is no official recommendation for more. 1. Tokyo Stock Exchange, Securities Listing Regulations (2009) Rule 436-2, Paragraph 1 Listed companies are required to secure at least one (1) independent director or one (1) statutory auditor*. * Statutory auditors (Kansayaku) in Japan are responsible for auditing a company s compliance with laws and regulations. They are permitted to attend board meetings, but do not have a vote. ACGA Ltd, 2010 Page 6 12/21/2011

7 KOREA At least 25% of the board must be outside directors, although certain companies determined by Presidential Decree must have three or more outside directors (and more than half their board). Recommendation: The boards of large listed companies should have 50% outside directors (and a minimum of three). Outside directors were introduced in Korea in 1998 as part of the government s corporate (chaebol) restructuring policies. The current sources are: 1. Commercial Act Article (Appointment of Outside Directors) (1) Listed companies shall ensure that outside directors make up not less than 1/4 of the total number of directors, except in cases determined by Presidential Decree in consideration of the size of assets; Provided, That listed companies determined by Presidential Decree in consideration of the size of assets, etc., shall appoint three or more outside directors and the number of outside directors shall account for more than half of the total directors. 2. Korea Exchange Listing Regulation Chapter III. Administration of Listed Company Section 53. Outside Directors of KOSPI-Listed Corporations (1) The number of outside directors of a KOSPI-listed corporation shall be at least one-fourth of the total number of directors. However, the number of outside directors of the KOSPI-listed corporations specified in Article 542-8(1) of the Commercial Act shall be at least three (3) persons, which shall be the majority of the total number of directors. 3. Code of Best Practices for Corporate Governance (2003) 2.2 The Board should include outside directors who are in a position to carry out their responsibilities independently from the management, controlling shareholders and the corporation. The number of outside directors should be a minimum of two, so that the Board is able to maintain practical independence. Particularly, in the case of large listed corporations, it is recommended that half of its directors be composed of outside directors (minimum of three outside directors). (continued over) ACGA Ltd, 2010 Page 7 12/21/2011

8 However, a large listed controlled company of which more than 50% of the voting power is held by an individual, a group or another company (refers to a company of which more than 50% of voting power is held by individuals or a group), does not need to have a majority of its board composed of outside directors. KOREA Banking Act (2000) Korea s banking law imposes on bank boards the higher standard outlined above regarding number and percentage of outside directors. Article 22 (Composition of Board of Directors) (2) Each financial institution shall appoint not less than three directors who are not engaged in the general affairs of the board of directors (hereinafter referred to as outside directors ). The number of outside directors shall not be less than 50% of the total number of directors. Financial Investment Services and Capital Markets Act (2009) A new law designed to facilitate innovation and competition in the capital market, protect investors, and foster the development of the financial investment business. Accordingly, its rules are aimed at providers of financial services, such as investment banks and brokerages, collective investment schemes, investment advisory firms and managers of trusts. This law does not cover financial institutions regulated by the Banking Act or insurance companies regulated by the Insurance Act. This law also imposes the same higher standard for board independence: Article 25 (Appointment of Outside Directors and Composition of Board of Directors) (1) Each financial investment business entity shall have three or more outside directors, and the number of outside directors shall account for at least one half of the total number of directors. ACGA Ltd, 2010 Page 8 12/21/2011

9 MALAYSIA At least two independent directors or one-third of the board, whichever is higher. Recommendation: At least one-third of the board. Where there is a significant shareholder, however, the proportion of independent directors should reflect the percentage ownership of the other shareholders. 1. Bursa Malaysia, Listing Requirements Chapter 15 Corporate Governance PART B - DIRECTORS Composition of the board of directors (1) A listed issuer must ensure that at least 2 directors or 1/3 of the board of directors of a listed issuer, whichever is the higher, are independent directors. (2) If the number of directors of the listed issuer is not 3 or a multiple of 3, then the number nearest 1/3 must be used. 2. Malaysian Code of Corporate Governance (2000. Revised 2007) Part 2: BEST PRACTICES IN CORPORATE GOVERNANCE Constituting an effective board III Board Balance Non-executive directors should be persons of calibre, credibility and have the necessary skill and experience to bring an independent judgement to bear on the issues of strategy, performance and resources, including key appointments and standards of conduct. To be effective, independent non-executive directors should make up at least one-third of the board membership. Size of non-executive participation IV In circumstances where a company has a significant shareholder, in addition to the requirement that one-third of the board should comprise independent non-executive directors, the board should include a number of directors which fairly reflects the investment in the company by shareholders other than the significant shareholder. For this purpose, significant shareholder is defined as a shareholder with the ability to exercise a majority of votes for the election of directors. (continued over) ACGA Ltd, 2010 Page 9 12/21/2011

10 V In circumstances where a shareholder holds less than the majority but is still the largest shareholder, the board will have to exercise judgement in determining the appropriate number of directors which will fairly reflect the interest of the remaining shareholders. MALAYSIA Bank Negara Guidelines Malaysia s central bank, Bank Negara, sets stricter rules on board composition for banks, including limiting the number of executive directors: Maximum Number of Executive Directors 2.27 As the function of the board is to provide effective oversight over management, the number of executive directors on the board should be kept to the very minimum. In this regard, there should not be more than one executive director on the board of a Licensed Institution and preferably it should be the CEO. However under exceptional circumstances, Bank Negara Malaysia may allow, up to a maximum of two executive directors. The board of a Licensed Institution may, however, invite other senior management officers to attend board meetings to provide inputs as and when necessary. Minimum Number of Independent Directors 2.28 Licensed institutions are required to ensure that at least one-third of their board members are independent directors. However, in cases where Bank Negara Malaysia has concerns on the effective functioning of the board, a higher proportion of independent directors may be specified by Bank Negara Malaysia. In addition, all resignations and removal of independent directors from the board can only take effect after the respective board has cleared the resignation and removal of the independent directors with Bank Negara Malaysia. This is to ensure the effective functioning of independent directors. ACGA Ltd, 2010 Page 10 12/21/2011

11 PHILIPPINES At least two independent directors or at least 20% of the board, whichever is lesser but not less than two. Recommendation: There is no official recommendation for more. The Revised Code of Corporate Governance (July 2009) simply clarified that companies could not have less than two independent directors since some listed companies had just one prior to that time. 1. SRC Rule 38 Requirements on Nomination and Election of Independent Directors (2004)* Article 7. Number of Independent Directors A. All companies are encouraged to have independent directors. However, issuers of registered securities and public companies are required to have at least two (2) independent directors or at least 20% of its board size, whichever is lesser. Provided further that said companies may choose to have more independent directors in their boards than as above required. *The original rule on independent directors was promulgated in July 2000 as part of the new Securities Regulation Code (SRC). The SRC was amended in February 2004, but the rule on the number of independent directors did not change. 2. Revised Code of Corporate Governance (2009) Article 3. Board Governance A) Composition of the Board All companies covered by this Code shall have at least two (2) independent directors or such number of independent directors that constitutes twenty percent (20%) of the members of the Board, whichever is lesser, but in no case less than two (2). ACGA Ltd, 2010 Page 11 12/21/2011

12 SINGAPORE At least two independent directors. Recommendation: At least one third of the board. 1. Singapore Exchange, Listing Manual, Chapter 2, Part III, 210 (5) Directors and Management (c) The issuer's board must have at least two non-executive directors who are independent and free of any material business or financial connection with the issuer. 2. Code on Corporate Governance (2005) Board Composition and Guidance Guidelines: 2.1 There should be a strong and independent element on the Board, with independent directors making up at least one-third of the Board. Note: Listed companies in Singapore do not have to comply with Guidelines, but they are required to disclose and explain any deviation from any guideline. MAS Guidelines for Banks (2005) Banks in Singapore are subject to stricter rules on independence. Their boards must comprise at least one-third independent directors, according to guidelines published by the Monetary Authority of Singapore (MAS). Board Composition and Guidance Guidelines: 2.1 There should be a strong and independent element on the Board, with independent directors making up at least one-third of the Board. ACGA Ltd, 2010 Page 12 12/21/2011

13 TAIWAN No mandatory requirement for all listed companies, but since 2002 newly listed firms must have at least two independent directors and one independent supervisor. In addition, the regulator has the right to require certain types of companies to appoint at least two independent directors (and not less than 20% of the board). Recommendation: At least two and not less than 20% of the board. 1. TWSE/GTSM Listing Rules (Amended 2002) The Listing Rules of the Taiwan Stock Exchange (TWSE) and the GreTai Securities Market (GTSM), the board for smaller growth companies, were amended in 2002 to require all newly listed companies to appoint at least two independent directors and one independent supervisor. At least one of the independent directors must be an accounting or finance expert. 2. Securities and Exchange Act (Amended 2006) Article 14-2: A company that has issued stock in accordance with this Act may appoint independent directors in accordance with its articles of incorporation. The Competent Authority*, however, shall as necessary in view of the company's scale, shareholder structure, type of operations, and other essential factors, require it to appoint independent directors, not less than two in number and not less than one-fifth of the total number of directors. 3. Corporate Governance Best-Practice Principles for TSEC/GTSM Listed Companies (2002) Article 24: A TSEC**/GTSM listed company shall appoint independent directors in accordance with its articles of incorporation not less than two in number and not less than one-fifth of the total number of directors. (Note: Despite the use of shall in this article, the Principles were non-mandatory. Should would be a more accurate translation.) *The Competent Authority refers to the Securities and Futures Bureau, which falls under the Financial Supervisory Commission. **The TWSE was formally called the Taiwan Stock Exchange Corporation (TSEC). Principles for Corporate Governance of Banks (2009) All listed banks in Taiwan must have independent directors. Article 31: Listed banks in Taiwan must appoint at least two independent directors or one-fifth of their board, whichever is greater. ACGA Ltd, 2010 Page 13 12/21/2011

14 THAILAND At least one-third of the board and no less than three independent directors. Recommendation: There is no official recommendation for more, since the best practice recommendation has just become the rule. 1. SEC Rule (2007, with effect from 2010) (1) The Company s independent directors shall constitute no less than one thirds of the board of directors and shall consist of at least three persons; 2. The Principles of Good Corporate Governance for Listed Companies 2006 Recommended Best Practices 1. Board Structure 1.1. The board of directors, with approval from the shareholder meeting, should set an appropriate number of its members and composition. There should be a number of independent directors equivalent to at least one-third of the board size, but not less than 3. The remaining directors on the board should be representatives of each group of shareholders; the number of directors should be proportionate to the ownership of each group. Bank of Thailand (BOT) The Financial Institutions Business Act of 2008 provides the BOT with the authority to define the appropriate structure of a board of directors and subcommittees of the financial institutions to establish appropriate checks and balances. ACGA Ltd, 2010 Page 14 12/21/2011