In order to supervise business operations and safeguard the interests of all parties involved —clients, staff, shareholders, the general public, and investors — the Board of Directors was founded. Conflicts of interest can sometimes make it difficult for boards to decide what is best. In an attempt to improve transparency and accountability in the organisations they represent, independent directors provide objective viewpoints on these choices.
In an effort to assist businesses interested in good governance, this page outlines the goals, duties, and tasks of independent directors. It also demonstrates when and why expertise of independent directors is necessary.
What is an Independent Director?
An Independent Director is a non-executive director who is not materially connected to the company or its management. This independence is crucial as it allows the director to make impartial and objective decisions without being influenced by conflicts of interest. Relationships that might compromise independence include employment ties, family connections, or business dealings that could affect the director’s ability to act in the company’s best interest. For instance, a director who holds significant influence over the company’s decisions or has a controlling position may not be considered independent. Similarly, involvement in a competing business could also disqualify a director from being truly independent.
Independent directors must be at least 18 years old and have full legal capacity, with no upper age limit. However, individuals convicted of crimes involving fraud or dishonesty, or who are bankrupt with unresolved debts, cannot serve as independent directors. There are no nationality restrictions for independent directors, but companies listed on the Singapore Exchange (SGX) must have at least two independent directors who reside in Singapore. Additionally, a company or any non-individual entity cannot serve as an independent director.
Beyond these formal requirements, independent directors must also act with impartiality, integrity, and sound judgment. They must avoid any connections with entities that could compromise their independence. The company’s Board must disclose all independent directors in the annual report, including the criteria used to assess and maintain their independence.
Unlike salaries, which could create dependencies, directors’ fees require approval by a simple resolution at a shareholders’ meeting. This structure helps preserve the independence of directors. Under SGX Listing Rules, compensation for independent directors of publicly listed companies must not include commissions, profit shares, or turnover percentages. Instead, fees are determined based on the director’s contributions, considering their time, effort, and responsibilities. Adequate compensation is essential to attract, retain, and motivate directors to govern the company effectively over the long term.
While disclosing director fees to shareholders is not mandatory, doing so aligns with best practices in corporate governance both in Singapore and internationally. In certain cases, shareholder demand can compel a company to reveal director remuneration.
To maintain independence, a Nominating Committee—comprising three or more directors, the majority of whom are independent—annually assesses each director’s independence. Notably, there is no upper limit on the number of independent directors a company can have.
Necessity of an Independent Director: Role and Responsibilities
The Board’s primary duties include setting goals for Management, keeping an eye on performance, and giving Management a success rating and compensation. In management, executive directors could be in many conflicts of interest. The Board must have at least 75% non-executive directors in order to guarantee proper checks & balances and avoid excessive management influence. Independent directors are an essential part of the board since they serve as a check and balance on the organization’s management procedures.
While management and executive officers are in control of day-to-day operations, the Board is responsible for corporate governance. If the company fails or breaks down as a result of scandals, corruption, or violations of regulations, independent directors are responsible for carrying out the necessary corrective measures or averting such incidents in the future. For instance, the Board looked into claims of financial irregularities and mismanagement, which led to the former CEO of Zilingo’s termination. Independent directors are therefore crucial to preventing corruption on the Board and in business management.
Independent directors assist in preventing majority shareholders from abusing their voting power to punish minority shareholders in order to protect the interests of the company, particularly minority shareholders. Maintaining the organization’s mission focus, weighing the interests of stakeholders, and encouraging adherence to sound corporate governance practices are the duties of independent directors. For example, upon becoming suspicious of financial malpractices, the Board of fintech company BharatPe promptly engaged audit companies to look into the financial practices and corporate governance of the managing director. Since independent directors are neither staff members nor part of the management group, they are not involved in day-to-day operations of the company.
Nonetheless, they have the same responsibilities and are liable for the same violations and civil penalties as other directors. However, independent directors have often avoided legal action by exercising the necessary caution, expertise, and investigation. While a particular amount of expertise is not required, independent directors must be aware of their legal responsibilities in Singapore and comprehend the duties stipulated in the company charter.
In addition, fiduciary responsibilities to the company and mandatory obligations under the Companies Act bind independent directors. Significant duties for independent directors include chairing board meetings, attesting to minutes, and, in the case of a tie, presiding over shareholder meetings with a casting vote.
As required by the SGX Listing Rules, lead independent directors provide management with an additional level of scrutiny and may occasionally be requested to make decisions on specific issues. The lead independent director of the board may assist in facilitating communication between the board and shareholders or other stakeholders when conventional channels of communication are inadequate or inappropriate. Stakeholders and shareholders should be made aware of the Lead Independent Director’s contact information by the company.
Apart from assisting the Chairman in leading the Board, the Lead Independent Director could also be in charge of chairing board meetings in the Chairman’s absence and facilitating private discussions amongst non-executive directors. Furthermore, in addition to assisting the Nominating Committee with annual performance reviews and succession planning, the Lead Independent Director may assist the Remuneration Committee in formulating and assessing the Chairman’s compensation.
Remarkably, non-listed companies are able to opt to hire independent directors; in Singapore, these positions are only legally required for listed businesses. As of January 1, 2022, listing requirements mandate that at least one-third of the Board of Singapore-listed corporations be composed of independent directors. The legal framework in Singapore stipulates that listed firms are subject to additional responsibilities, hence fortifying the standing of independent directors inside these companies.
For any public company, an audit committee made up mainly of independent directors is a must. Its responsibilities encompass overseeing interested-party transactions, evaluating significant financial reporting issues, and keeping an eye on whistleblower protocols. As to the 2018 Code of Corporate Governance, public enterprises’ appointment of independent directors is subject to the ‘comply or explain’ principle.
In conclusion, given their position within the firm and understanding of its operations, independent directors have an obligation to participate in constructive dispute resolution with management and to help develop corporate strategy. An independent director participates in hiring, assessing, and paying executive directors and other key management personnel in addition to assessing management’s performance in reaching predetermined goals.
Conclusion
The Board should include a strong, independent individual. An Independent Director (ID) must be able to make impartial decisions without being influenced by the company, its subsidiaries, major shareholders, executives, or the industry.
Independent directors play a vital role in safeguarding the interests of the company and its shareholders by ensuring sound corporate governance and maintaining the Board’s objectivity. They are particularly important in the Nomination, Remuneration, and Audit Committees, where they assess the independence of directors, protect the company’s finances, and determine director compensation.
For help with appointing independent directors or meeting legal requirements, consider working with a corporate services provider. Their expertise can make selecting the right independent directors for your company easier.
The Board is also responsible for creating a Board Diversity Policy, with both quantitative and qualitative goals when necessary. It may delegate the development and assessment of these goals to a relevant committee, such as the Nomination Committee.
Please note that this article does not constitute express or implied legal advice, whether in whole or in part. For more information, email us at info@silvesterlegal.com
