Independent directors & failure of corporate governance

Failure to punish insider-trading executives at CP-All (7-11), one of many examples of independent directors not doing job.

BIG BUSINESS & CORPORATE GOVERNANCE

Independent directors: Expectations vs Reality

11/04/2016
Teera Phutrakul

It was not that long ago when chief executives reigned supreme.

Friends and golf buddies were hand-picked to join their boards of directors.

Board members were given generous perks and meeting fees, leaving the chief executives to run the show unchallenged, doing as they saw fit.

Then came the financial crisis of 1997 when the gravy train came to a sudden halt.

INDEPENDENT DIRECTORS AS CURE-ALL

Since then regulators and institutional investors have been pushing the concept of "independent directors" as the cure-all for what ails Thailand's corporations.

Embracing shareholders' value became the mantra for most companies and independent directors have been championed as a way to better monitor executives while also allowing minority shareholders a voice at the table.

AUDIT NOMINATING & COMPENSATION COMMITTEES: ONLY INDEPENDENT DIRECTORS

Corporate governance movements in Thailand are very much in line with the US where audit and nominating committees are required to be composed solely of independent directors.

The move was embraced more fully by the Dodd-Frank Act, which requires that members of a board's compensation committees be independent.

Large financial institutions are also required to have separate risk committees composed solely of independent directors.

Today, the pendulum has swung toward boards that are populated by independent directors with the chief executive as the sole non- independent director on the board.

And yet two decades later (two decades on) since the eruption of the 1997 crisis, it seems we are back to the bad old days of crony boards.

INACTION OF INDEPENDENT DIRECTORS ON INSIDER TRADING

Incidentally, independent directors have not had a great track record lately.

A recent case in point involves one of Thailand's largest operators of convenience stores with a market capitalisation of 350 billion baht.

Much has already been covered by the media about the record fines of 30 million baht being paid by the senior executives of said company for insider trading offences.

But what was particularly galling was the inaction by the audit committee and independent directors of the company, allowing the guilty executives to remain in their jobs without any punishment.

TOTAL DISREGARD FOR SECURITIES LAW & CORPORATE GOVERNANCE

Another case involves a large Thai bank that de-listed its life insurance arm from the stock exchange.

In doing so, the bank decided to take a shortcut and did not use an independent financial adviser, but appointed itself as the adviser with total disregard for both securities law and required corporate governance.

Worst still, there was an overlap between board members of the bank and that of the insurance arm, which put both boards in an impossible situation to ensure transparency and fairness to all shareholders.

TURNED BLIND EYE TO BLATANT MISCONDUCT

It is baffling why these independent directors have let down shareholders so badly.

On paper these people have all the right credentials with sterling reputations to match.

And yet when push comes to shove, they failed to uphold their fiduciary duties and turned a blind eye to blatant misconduct.

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RIGHT INSIDER-OUTSIDER MIX

Experts remain divided about the right mix of independent and inside directors.

The quest for better corporate governance through independent directors may be good in some measure but having too many outsiders means boards are losing the inside expertise they may need to properly run the company.

IMPORTANCE OF CHIEF EXECUTIVE LEADERSHIP

Interestingly enough, failed banks like Lehman Brothers and Bear Stearns had boards with a supermajority of independent directors. While internal executives may have failed to spot the financial crisis, boards didn't do much better. The two banks that survived the subprime crisis best -- Goldman Sachs and JPMorgan -- did so because of strong chief executive leadership.

My personal observation is independent directors are not really that independent and are still beholden to the chief executive and/or founding shareholders of family-owned companies.

In addition, many of these independent directors have full-time jobs, so one cannot expect them to crunch numbers on risk management spreadsheets to fully understand the firm's risk.

The evidence is mixed at best about the merits of independent directors, so to push blindly for better corporate governance through independent directors may become a quest for the Holy Grail.

FAILED INDEPENDENT DIRECTORS

I don't want to be a drama queen on this, but I would urge the Institute of Directors (IoD) to conduct a self-assessment on what went wrong and how its training courses and curriculum can be enhanced, as many of these failed independent directors are paying members of the institute.

They have been through the required courses but obviously the good governance messages -- duty of care, loyalty -- were lost in translation.

It is important to address this issue or else IoD will become irrelevant in the eyes of the investing public if persistent bad behaviour and blatant misconduct continue.

Teera Phutrakul CFP® is a financial planner professional and the Chairman of the Thai Financial Planning Association as well as a Fellow Member of the Thai Institute of Directors.

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http://www.bangkokpost.com/business/news/929473/independent-directors-expectations-vs-reality

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