Role and limits of independent directors

The concept of an Independent Director is inherent in its name: a director who is independent and operates with impartiality and autonomy.

The Revised Corporation Code mandates that corporations vested with public interest and public companies ensure that at least 20 percent of their board members are independent directors.

The law defines an independent director as “one who, apart from shareholdings and fees received from the corporation, is independent of management and free from any business or other relationship which could reasonably be perceived to materially interfere with the exercise of independent judgment in carrying out the responsibilities as a director.”

They serve as a check-and-balance within the board, ensuring that decisions are made objectively and that no single group of directors dominates the corporation’s decision-making process and overall governance.

The Code of Corporate Governance for Publicly Listed Companies (CG Code) requires that the board be composed of at least three independent directors or one-third of the total board membership, whichever is higher. Although the CG Code is not mandatory and applies only to publicly listed companies, some ordinary corporations voluntarily elect independent directors to their boards as part of their commitment to good corporate governance.

As more companies embrace the principles of good governance, the demand for independent directors has increased, leading to a rise in available board seats. However, this also raises concerns about directors holding multiple independent roles across different corporations, potentially affecting the effectiveness of their independence.

The CG Code limits an independent director to serving in a maximum of five corporations simultaneously. This restriction has significant practical implications, as Principle 4 of the CG Code emphasizes that board members must demonstrate full commitment to the company.

Directors are expected to dedicate sufficient time and attention to effectively fulfill their duties and responsibilities. When a director is spread too thin balancing multiple board memberships, they may struggle to fully grasp the intricacies of each business, thereby impairing their ability to make well-informed and strategic decisions.

An independent director holding too many board seats may also face conflicts of interest.

As board members, they are bound by the duties of care and loyalty, which require them to make informed decisions with due diligence and to act in the best interest of all shareholders equally.

However, when serving on multiple boards, an independent director may encounter situations where they are obligated to support a matter for one corporation while opposing it for another, a textbook example of conflict of interest.

As board members, they are bound by the duties of care and loyalty, which require them to make informed decisions with due diligence and act in the best interests of all shareholders equally.

This undermines the very essence of an independent director, whose role is to provide objective and impartial decision-making.

The five-corporation limit for independent directorships is outlined in the CG Code, which follows a comply-or-explain approach, making it non-mandatory in nature.

However, corporations should take meaningful steps to integrate the principles of the CG Code into their governance framework.

Doing so upholds a strong corporate reputation and fosters ethical business practices, both of which contribute to the corporation’s long-term success for the benefit of all stakeholders.