An "independent" director is one who has no relationship with the company, its related corporations4, its 10% shareholders or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director's independent business judgement with a view to the best interests of the company. The Board should identify in the company's Annual Report each director it considers to be independent. The Board should determine, taking into account the views of the Nominating Committee ("NC"), whether the director is independent in character and judgement and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director's judgement. Directors should disclose to the Board any such relationship as and when it arises. The Board should state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, including the following:
This Guideline sets out the criteria in determining the independence of a director.
Independence is fundamentally a state of mind. As it is almost impossible for anyone to determine the (future) state of mind of a director, the Guideline sets out proxies or tests of independence.
There are, in effect, two sets of criteria in this Guideline: general and specific.
The general criterion of independence is that “the director is independent in character and judgement and [that there are no] relationships or circumstances which are likely to affect, or could appear to affect, the director's judgement”.
For the specific criterion, the overall caveat is that the independent director “has no relationship with the company, its related corporations, its 10% shareholders or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director’s independent business judgement with a view to the best interests of the company.”
The Guideline provides a list of examples of specific relationships or circumstances that are likely to affect, or could appear to affect, a director’s judgement. This list provides various permutations of the director or his immediate family member being employed, remunerated, or engaged in a business relationship with the company, its related corporations, its management, or its 10% shareholders.
There are several important points to bear in mind about this list of examples:
- The list is not exhaustive. For example, Guideline 2.4 sets out a nine-year rule – one of the circumstances when a director could be deemed to be non-independent. These are only examples, and each Board should determine whether there is any circumstance or relationship which might impact a director’s independence – or the perception of his independence – notwithstanding that such a situation is not specifically provided for in the examples (meaning the general criteria applies).
- The examples are meant to illustrate likely non-independence. In fact, the Guideline implies that if any of the situations described occurs, the director should be deemed to be not independent in the first place. However, the Board can still consider a director to be independent notwithstanding the existence of any of these situations. However, if it does so, it has to fully disclose the nature of the director’s relationship in the company’s annual report, and why the Board has nevertheless maintained the director to be independent.
- The Code draws the following lines on relationship:
- Shareholdings in related corporations. A related corporation, meaning a corporation that is the company’s holding company, subsidiary or fellow subsidiary, is treated as an extension of the company for this purpose of determining independence.
Shareholding at 10%. Although the Securities Futures Act defines a substantial shareholder at 5% shareholding, the Code raises the threshold for the independent relationship “because a 10% shareholding confers meaningful rights such as the ability to requisition for a general meeting of the company” (as in Section 176(1) of the Companies Act). A 10% shareholding is also used as a blocking vote for privatisations by way of voluntary delistings (SGX MR 1307).
Immediate family members of the director to include his spouse, child, adopted child, step-child, brother, sister, and parent. This definition follows the SGX-ST Listing Manual.
Past three (financial) years of employment. This cooling-off period avoids conflicts of interests that may arise from the director’s or immediate family member’s affiliation with management and other parties.
Overall, this Guideline emphasises judgement, perception, and disclosure:
- Judgement: The NC and the Board are required to determine whether each director is independent in character and judgement and that he has no relationships, or there are no circumstances, that are likely to affect, or could appear to affect, his judgement.
- Perception: The Board’s judgement is not just about whether a director is actually independent (a difficult point to prove in most instances) but also whether there could be a perception of non-independence on the part of the director (“… could appear to affect the director's judgement”).
- Disclosure: When there could be a doubt about a director’s independence and the Board still decides to declare him as independent, then a full disclosure of the relationship and why the director is consider independent must be made so that stakeholders can properly understand the nature of the situation and the basis of the decision.
B. SGX Disclosure Guide
Is there any director who is deemed to be independent by the Board, notwithstanding the existence of a relationship as stated in the Code that would otherwise deem him not to be independent? If so, please identify the director and specify the nature of such relationship.
What are the Board’s reasons for considering him independent? Please provide a detailed explanation.
C. Related Rules and Regulations
- Section 176(1) of the Companies Act: Convening of extraordinary general meeting on requisition [10% shareholder].
- SGX MR 1307 and CR 1307: Delisting.
- SGX MR and CR: Definitions and Interpretation (see “Immediate Family”).
D. CG Guides
- Board Guide 5.10: The Non-Executive Director [Director Duties].
- NC Guide 3.6: Nomination Process [Nomination and Appointment Process].
- NC Guide 3.8: Appointment and Election of Directors [Nomination and Appointment Process].
- NC Guide Appendix 3B-4: Removal of an Independent Director [Nomination and Appointment Process].
- NC Guide 4.3: Assessment of Independence Status [Director Independence].
- NC Guide 4.4: Criteria for Independence [Director Independence].
- NC Guide Appendix 4B-1: Determining Director Independence [Director Independence].
- NC Guide Appendix 4B-3: Interested Person Transactions Involving Independent Director [Director Independence].
- NC Guide Appendix 4C: Sample Form for Confirmation of Director’s Independence [Director Independence].
E. Related Articles
- "Who should judge on independence?” by Adrian Chan. (446KB)
- “The nine-year rule” by David Conner. (444KB)
- “Conflicts of interest: duties and consequences” by Gerard Tan. (62KB)
- “Conflicts of interest: perception is reality” by Gerard Tan. (45KB)
- “Determining interested persons and related parties” by Gerard Tan. (44KB)
- “Conflicts of interest: how would one know?” by Gerard Tan. (51KB)
- “Independent directors: Neither tigers nor pussy cats” by Anabelle Yip. (255KB)
- “Proposed changes to the definition of ‘independence’ ” by Adrian Chan. (69KB)
- “A calling for more independent directors” by Farhana Siddequi & Lam Shiao Ning. (98KB)
- “In search of the truly independent director” by Willie Cheng. (1.4MB)