Published date01 December 2015
Citation(2015) 27 SAcLJ 304
AuthorCHIA Yaru LLB (National University of Singapore), LLM Candidate (National University of Singapore), Kwa Geok Choo Graduate Scholar.
Date01 December 2015

Conventional wisdom predicts that independent directors help curb director misfeasance by critically overseeing management, and is the hallmark of good governance. However, such wisdom might not be too wise and fully accurate as board independence was clearly insufficient to prevent corporate scandals such as Enron. Indeed, board independence is not sufficient in and of itself, and board diversity complements board independence in improving corporate governance. As there are many benefits to a diverse board, Singapore should adopt a gender quota regime to attain a critical mass of female directors on corporate boards. As the broader framework of Singapore's Code of Corporate Governance is on a comply-or-explain basis, such a quota should similarly not be mandatory. Such a comply-or-explain gender quota strikes a good balance between capitalising on the effectiveness of a quota system, yet doing away with any rigidity which might come with it. A disclosure rule, promoting transparency in corporations' diversity policies, should also be enacted to ensure corporations' commitment towards gender diversity. Both the quota and disclosure rule are mutually reinforcing, and would definitely help Singapore in attaining an inclusive and vibrant society.

I. Introduction

1 Independence as a solution to director misfeasance is now a recurring theme in the corporate governance codes of many jurisdictions, as independent directors are seen as better monitors with their ability to bring an outside perspective when making board decisions.1 However, having independent directors would not have prevented the Enron and WorldCom corporate scandals.2 Indeed, Enron had already abided by the

corporate best practices of having independent directors on its board, but this did not stop the board from “falling asleep at the wheel”.3 This is because independence has mainly focused on the absence of any conflict of interests,4 but this does not go far enough in achieving the level of monitoring sufficient for good corporate governance, and to discourage groupthink.5 Corporate governance should strive to have “active, open- minded thinking”,6 and this is where board diversity steps in to “achieve the kind of active, critical thinking that independence rules are designed to achieve”.7 Together, board independence and board diversity can produce more effective boards with increased perspectives and better performance through more active decision-making.8

2 While board diversity has always been discussed in business literature, little is mentioned in corporate governance literature and it is only in recent years that pertinent questions about the specific content of board diversity have surfaced. While board diversity comprises many different characteristics such as age, ethnicity, nationality and education background, gender diversity is a common element in all countries as the issue of low female representation on boards is universal.9 Thus, this article will focus on the gender diversity of board members. Besides, as there is an increasing demand for corporations to provide more opportunities for women to rise up to the challenge of becoming directors, it is timely and interesting to examine whether gender diversity improves corporate performance and the ways to ensure such diversity. Indeed, the International Monetary Fund chief Christine Lagarde believes that “if the Lehman Brothers had been the Lehman Sisters, today's economic crisis clearly would look quite different … there were [only] two women on the 10 person board of the Lehman Brothers”.10 This is corroborated by Hedge Fund Boss Lex van Dam, who declared that “women have a much higher sense of risk control than men … and it can

help avoid many of the disasters that risk taking by a male dominated trading environment has caused over the years”.11

3 Currently, there are varying sentiments to gender diversity, with only some countries adopting it. Even among these countries, different approaches to enforcing gender diversity have been implemented. While some countries like Norway have mandatory quotas to ensure that a certain number of board members are women, other countries such as the US have diversity disclosure procedures.12 In Singapore, while there is a provision in its corporate governance code which states that boards should comprise a diverse group of directors, it does not require corporations to disclose these diversity policies nor have a quota, and thus, has not much force.13 In fact, while Singapore has one of the highest education and workforce participation rates for women, Singapore's female board representation is still one of the lowest among developed countries.14 Hence, this article aims to critically discuss whether there is a need to more actively regulate board diversity in Singapore.

4 The balance of this article will proceed as follows. In Part II,15 the criteria of independent directors in Singapore will be discussed. Part III will show how focusing on independence alone is insufficient, and that board diversity is necessary to improve corporate governance.16 Part IV will then discuss the benefits of board diversity.17 Part V will discuss various factors which could possibly influence the ease of adoption of board diversity regulation in Singapore.18 Part VI will then examine in detail the four main models of board diversity, namely: (a) Norway's mandatory gender quota; (b) the Netherlands' comply-or-explain gender quota; (c) the US's mandatory diversity disclosure regime; and (d) the UK's comply-or-explain diversity disclosure regime, to determine which model is the most suitable for Singapore to adopt.19 In Part VII, this article will argue that Singapore should adopt a boardroom gender quota, but under a comply-or-explain regime.20 Such a regulation combines the

benefit of a quota system to create a critical mass of female directors, while still mitigating the rigidity and harshness of a quota system, and makes it more acceptable to corporations by having it under a comply-or- explain regime. This article then concludes that diversity is strength, and it is hoped that Singapore will harness such strength in the near future.
II. Independent directors in Singapore

5 Without question, a significant feature of corporate governance is the managerial authority vested in the board. Section 157A(1) of the Singapore Companies Act21 clearly provides that the “business of a company shall be managed by or under the direction of the directors”. Given the central role that boards play and the risk created by the separation of ownership and control such that directors could “line their pockets at the investors' expense, diverting funds or shirking in their efforts”,22 Bebchuk notes that “selecting directors with the appropriate abilities and characteristics is important”.23 Such a sentiment is especially relevant in the light of how Singapore courts are often slow to interfere with commercial decisions taken by directors.24 This then raises the question of what are the “appropriate abilities and characteristics” Singapore directors should possess such that their decisions would be rightly respected?

6 Independence is widely seen as the solution to solving director misfeasance, as independence ensures that directors “do not feel beholden to managers”, and “can be trusted to critically examine decisions made by officers, as opposed to simply rubber-stamping those decisions”.25 As such, these independent directors can monitor management and minimise the danger of management abusing their power,26 especially in dispersed shareholdings where shareholders “face coordination and rational apathy problems”.27 On the other hand, in concentrated shareholdings, controlling shareholders can “exert their power by appointing and removing directors and are therefore in a better position

to control the managers' agency cost”.28 However, a different agency cost emerges between majority and minority shareholders, where there is a risk that the former might tunnel wealth out of the corporation for their own benefit.29 As such, independent directors in concentrated shareholdings perform a different function of supervising managerial actions, to prevent such actions from being driven by majority shareholders to the detriment of minority shareholders.30

7 The definition of “independence” in Singapore is codified in the Singapore Code on Corporate Governance31 under a comply-or-explain regime, and is based on a director “who 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 judgment with a view to the best interests of the company”.32 Such relationships mainly relate to whether the director in question is an immediate family member, or has a relationship with a substantial shareholder. This is probably because the majority of Singapore corporations listed on the Singapore Exchange have concentrated shareholdings,33 and for independent directors to provide effective supervision and checks-and-balances, they must be independent of substantial shareholders.

III. Marrying independence with board diversity

8 As monitoring agents, independent directors can adopt two forms of a monitoring board, namely, “strong” and “weak” forms.34 Under the “strong” form, a monitoring board is supposed to “enhance [firm] performance on an ordinary day-to-day basis”, while under the “weak” form, board monitoring will only “occur upon the appearance of significant difficulties in the firm's performance or other extraordinary events”.35 It has been argued that it is difficult for independent directors

to monitor management daily to achieve the “strong” form of monitoring, as independent directors are usually non-executives who are not directly involved in management, and do not have the same amount of knowledge and expertise as...

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