LETTER | On June 25, 2018 it was reported that the Perak State Development Corporation (PSDC) rejected the proposed remunerations to non-executive and independent directors amounting to RM150,000 during the AGM of Majuperak Holdings Berhad (MHB).

PSDC is the single largest shareholder in MHB.

Non-executive directors are generally independent directors, who devote their valuable time to address the strategic issues in the course of the board and committee meetings and use their expertise while guiding the management of the company from time to time.

Independent directors derive little benefit from the success of a listed issuer, despite the heavy and time-consuming responsibilities placed upon them as directors, by reason that they have little or no financial interest in, or business dealings with, the listed issuer. They are charged with the additional responsibility of protecting the interests of minority shareholders under the corporate governance guide.

With the additional responsibilities that are now placed on independent directors through the corporate governance guide, the line between an independent non-executive director and an executive director in a listed company is being blurred.

The demands placed on independent directors have increased significantly in recent years. The nature of their work is becoming more complex; the workload is increasing as are the responsibilities.

The calibre of independent directors and time now required to discharge duties have increased significantly.

Directors’ remuneration is the only tangible return which an independent director as with other non-executive directors would receive for providing directorship services.

The extent of remunerating independent directors determines their retention and motivation to discharge their duties without cloudy judgments.

An independent director cannot expect to comprehend and understand the operations of the company to the level of details which they are now responsible for without immersing themselves into the operations.

But if they were to do that, would they still be truly independent? Are they deemed overriding the authority of the executive directors whose responsibility is to manage the operations? If they do not immerse themselves into that level to obtain the details for them to understand the issue, they would have failed in their responsibilities as defined under the corporate governance guide.

The Majuperak case brings to the forefront the issue which has been lingering on the minds of a lot of independent directors who were appointed to the boards of public listed companies in Malaysia – are they deemed truly independent?

According to Paragraph 1.01 of the main market listing requirements (MMLR), an independent director is “a director who is independent of management and free from any business and other relationship which could interfere with the ability to act in the best interest of an applicant or a listed issuer.”

The corporate governance guide recognises that “independent directors are essential for protecting the interest of minority shareholders.”

To this end, Paragraph 15.02(1) of the MMLR requires every listed issuer to ensure that “at least two directors or 1/3 of the board of directors of a listed issuer (whichever is the higher) are independent directors.”

Paragraph 1.01 and Practice Note 13 (PN13) of the MMLR set out and clarify several non-exhaustive criteria that have to be satisfied in order for a person to be an independent director of a listed issuer.

Does complying with the above requirements satisfied the definition of independence when the fees and the allowances for the independent directors are paid from and by the company that appointed he or she to the board of directors?

Independent directors, who are truly independent, can be an effective barricade against corporate frauds and they should be seen not only to have carried out, but also discharged their responsibilities in a truly independent manner befitting their responsibility of protecting the interests of minority shareholders.

Until and unless the remuneration to the independent directors are from an independent source, there is very little to distinguish the independence of independent directors with a non-independent executive director who is remunerated for their work.

If the authorities and regulators do really want to champion a discipline and self-regulated market in the capital market in Malaysia, maybe it is high time they explore the option of unshackling the remuneration to independent directors from the company in which these independent directors represents.

t has never been proposed or implemented in any established markets before but I don’t see any harm why our country cannot explore and proceed with the idea of remunerating the independent directors from independent sources instead of by the companies that appointed them?

The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.