Alternative Views: Independence of independent directors under scrutiny

This article first appeared in Forum, The Edge Malaysia Weekly, on June 28, 2021 - July 04, 2021.
Alternative Views: Independence of independent directors under scrutiny
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Very rarely does corporate Malaysia come across independent directors who speak and act completely independently of the influence of promoters or major shareholders of companies.

Even when a company is mired in controversy, the independent directors do not speak out in defiance of the promoters or major shareholders to protect the interest of shareholders.

One of the rare occasions was when the independent directors of FGV Holdings Bhd gave a lengthy comment criticising the takeover of the plantation group by its parent, the Federal Land Development Authority, or FELDA. FELDA was not successful in its takeover but achieved its objective of increasing its stake in FGV to more than 75%.

While the independent directors of FGV voiced their objections, most did not. Instead, they resigned and slid away.

The most recent case involves Serba Dinamik Holdings Bhd independent director Datuk Mohamed Nor Abu Bakar, who resigned citing personal reasons, as the company found itself under the spotlight. Mohamed Nor, who has been the chairman of Serba Dinamik since its listing in 2016, resigned a day after he was replaced as chairman by Datuk Mohamed Ilyas Pakeer Mohamed.

It is hard to fathom that Mohamed Nor left the company for “personal reasons” when the company is facing serious allegations that its accounts do not represent its fair and true value. 

He is not the only independent director to walk away from a company at the height of a crisis. Two independent directors in the UEM group resigned after it bought a 32.6% stake in Renong, its parent company, in 1997 from undisclosed sources. It was a major sore point in corporate governance because it was viewed as a rescue of some shareholders in debt-laden Renong — the investment arm of Umno — by cash-rich UEM.

Both of the independent directors — Datuk Thomas Lee and Datuk Ernest Zulliger — resigned from the UEM board without stating any reason, leaving many to assume that they did not agree to UEM’s purchase.

Two directors of scandal-ridden 1Malaysia Development Bhd (1MDB) resigned in the early years of its formation when funds were being transferred out without board approval. Tan Sri Mohd Bakke Salleh and Tan Sri Azlan Zainol, two high-profile corporate personalities, left the 1MDB board in October 2009 and January 2010 respectively.

On hindsight, had they spilled the beans on 1MDB then instead of leaving quietly, Malaysia would have been spared the ignominy of having created the biggest financial scandal involving a government fund.

The silence of independent directors, even after leaving the board of companies that are mired in controversy, raises the question of whether their appointments are only to comply with the listing rules. And the unspoken law is that they walk away if they are unhappy with what’s happening in the company.

At times, even when the independent directors speak out, their statements are hard to comprehend, suggesting that they may not have been “so independent” after all.

For instance, the scathing attack by Serba Dinamik’s newly appointed independent chairman Mohamed Ilyas  against its external auditor KPMG is difficult to digest, considering that he had been appointed to the board only a week earlier.

Going through the books of a listed company within a week — especially Serba Dinamik, which has operations overseas — is a difficult task. But it is not impossible. Also, Mohamed Ilyas could have been briefed on the state of the accounts and the red flags raised by KPMG.

But the question is how reliable was the information in the books of Serba Dinamik, considering that there has not been any independent verification of the accounts?

Mohamed Ilyas was one of the three new independent directors appointed to the board of Serba Dinamik. The other two are Johan Mohamed Ishak and Masleena Zaid. Johan is the managing director of Awesome TV, in which Mohamed Ilyas is the chairman, while Masleena sits on the board of AP Holdings Bhd, where Mohamed Ilyas is also the chairman.

The question of the independence of all three new appointments on the same day to the board of Serba Dinamik has arisen even though they are not conflicted or related, and do not have any corporate dealings with one another or the company.

The fact is the trio move in the same business circles and are connected to one another in some ways. Hence, why the lack of diversity on the part of Serba Dinamik when it appointed all three as independent directors on the same day?

Considering the company’s situation, shouldn’t new appointments be from a wider and more diverse business circle?

Johan has been appointed as the audit committee chairman, replacing Hasman Yusri, who remains a member of the committee. Incidentally, Hasman was a long-time partner in KPMG until his retirement in December 2015.

There is nothing in the law that prevents an ex-partner in an accounting firm from becoming an independent board member of a listed company where his former firm is doing audit work. There have been several instances where former partners in accounting firms go on to head listed companies and the audit committees.

The late Datuk Khoo Eng Choo, Raja Tan Sri Arshad Raja Uda, Datuk Johan Raslan, and several others went on to hold independent board positions and sat on audit committees.

It had never been an issue until recent years, when a former partner in one of the big four accounting firms was appointed to head the audit committee of listed companies where he had signed off the accounts before retirement.

The appointment of the former partner to the audit committee was seen as a move that was not “so independent” because he had signed off the accounts previously and was an interested party. Hence, it was not right for the company to appoint the former partner to the audit committee after his retirement.

The updated version of the Malaysian Code of Corporate Governance addresses this issue. It states that a former partner of an external audit firm of a listed company has to observe a cooling-off period of three years before being appointed to the audit committee.

The role of independent directors is to protect the interest of shareholders and ensure directors are held accountable to them. That is why they have to be completely free from any conflict of interest.

Their independence from the major shareholders, promoters and management is determined by their actions and statements, especially when it comes to governance and accounting issues.

Note: At press time, five independent directors of Serba Dinamik had resigned. Four of them said it was because of a disagreement with the board’s decision to commence legal action against the company’s external auditor, KPMG PLT. The fifth, Masleena Zaid, who was newly appointed to the board, said it was due to personal commitment.

M Shanmugam is contributing editor at The Edge

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