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CFA Institute Report Calls for Cumulative Voting in Election of Directors

 

Nomination and election process can be improved in the appointment of independent non-executive directors in Asia-Pacific region


Hong Kong, January 12, 2010 – CFA Institute has published a report, "Independent Non-Executive Directors: A Search for True Independence in Asia" (PDF), reviewing corporate governance and independent non-executive directors (INEDs) in the Asia-Pacific region. The study reveals that family-owned businesses, with concentrated ownership structures and controlling shareholders, dominate the Asia-Pacific market and their ability to control the board of directors can lead to abuse of minority shareholders.

 

The report, which studied practices in Hong Kong, Singapore, India, and the Philippines, emphasizes the value of INEDs that are independent from both management and controlling shareholders in serving shareholders. It highlights recent cases that illustrate INEDs have resigned because they are unable to perform their duties effectively; and in some cases the failure of some INEDs in exercising their duties as directors of a company. Presently, family- or government-controlled companies can effectively dictate the nomination and election of all directors, including individuals that qualify as INEDs. In many cases they use these individuals as figureheads of independence, rather than true representatives for all shareholders. In several Asia-Pacific venues, this control exposes the company and its minority shareholders to risks of expropriation, where controlling shareholders can easily divert value of the listed entity to outside business interests for their personal benefit.

 

CFA Institute recommends that the nomination and election processes of directors should be reviewed and improved to ensure that true director independence is present on Asia-Pacific companies’ boards. Currently, if you have a five percent shareholding in Singapore, Hong Kong, or Malaysia, you are able to propose candidates for director positions that are to be voted at annual general meetings. CFA Institute believes one method of improving this is to lower the threshold of percentage holdings to nominate directors for election. That way the nomination committee cannot fully control the list of directors to be elected. It is also recommended that cumulative voting is introduced, which allows a shareholder to accumulate their votes for one nominated candidate. For example, if a shareholder has 100 shares and there are five directors up for election, instead of casting 100 shares for each director, you can actually accumulate 500 votes for one director; thus increasing the shareholder’s chances of electing their desired candidate.


Commenting on the report, Lee Kha Loon, CFA, head, Asia-Pacific, CFA Institute Centre for Financial Market Integrity said, “For responsible corporate governance in companies there must be true independence amongst INEDs, legal protection for minority shareholders, enforcement of rules and regulations, and sufficient statutory backing of laws. Through our recommendations we hope to see improvements to the nomination and voting of directors. As global markets compete for capital, investors will be more discriminating in choosing markets and companies that offer strong corporate governance protections.”

 

"Independent Non-Executive Directors: A Search for True Independence in Asia" also recommends that:

  • Better quality biographical information of nominees should be disclosed before any elections
  • The chairman should be an independent director and separate from the CEO
  • A majority-independent board should be considered best practice
  • A high level of training for new directors should be a requirement for the positions
  • A regional director certification program should be established

 

Lee Kha Loon, CFA, head, Asia-Pacific, CFA Institute Centre for Financial Market Integrity, is available for comment.

 

About CFA Institute

CFA Institute is the global association for the investment profession. It administers the CFA and CIPM curriculum and exam programs worldwide; publishes research; conducts professional development programs; and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. CFA Institute has more than 97,000 members, who include the world’s nearly 86,000 CFA charterholders, in 134 countries and territories, as well as 136 affiliated professional societies in 57 countries and territories. More information may be found at www.cfainstitute.org.