Independent Directors

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Printed For: Vinay M, National Law School of India University Bangalore
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(2003) 15 SAcLJ 355
Corporate Governance And Independent Directors
CORPORATE GOVERNANCE AND INDEPENDENT DIRECTORS

by
Tan Cheng Han*
A Introduction
1 The company is today the most widely used business vehicle, far outstripping
associations of persons in partnership. In the developed countries of the common law
world, for example, only the professions and sundry small businesses generally use
the partnership vehicle. Where the professions are concerned, this is largely due to the
perception that professional persons should be held to a higher standard and be
subject to the prospect of unlimited liability. However, the requirement for
professionals to engage in their profession only through the partnership vehicle, and
with the prospect of unlimited liability for all partners, is being rapidly eroded. One of
the main advantages of incorporation is that investors in the enterprise are not
personally liable, in the absence of any direct assumption of responsibility on their
part, for the debts and other liabilities of the company.1 It is becoming increasingly
accepted that professional practices are also essentially business enterprises that
ought to be allowed the benefit of limited liability afforded by the corporate vehicle. In
addition, as the number of professional negligence suits has increased, the professions
have also lobbied vigorously for such protection. It is often argued by the professions
that the potential liability each professional person bears is out of all proportion to the
fees charged for their professional services, thereby shifting risk unfairly to them. It is
also often said that as professional indemnity schemes are common, indeed
sometimes compulsory, the professions are the ones ultimately insuring losses caused
to third parties even where there are other parties (usually uninsured) involved.
Today, as a result of these views, many jurisdictions allow associations of professionals
to carry on business
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through a corporate vehicle.2 Some also allow limited liability partnerships,3 which are
common in Europe4 but never really took off in the common law world.
2 Although a company in the eyes of the law is a different creature from a partnership,
where small or closely held companies are concerned, the operation and management
of such companies may be little different from a partnership. Indeed, many small or
closely held companies may have previously been partnerships that later adopted the
corporate form. Such companies are often referred to as “quasi-partnerships”5
although the term is of course misleading.6 In such companies, there may be virtually
no difference between ownership and management. Many of the shareholders of such
companies will be involved in the management of these companies. Even where they
are not directly involved, the often-informal nature of such associations will usually
mean that their views will be taken into consideration, or that they will be consulted
on important matters.
3 In the case of large companies whose shares are listed on a stock exchange, the fact
of the listing will usually mean that the shareholder spread is diverse. In publicly
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listed companies, there is usually some dichotomy between ownership and

management. In a famous work, attention was called to the prevalence in the United
States of widely held companies where ownership is dispersed among small
shareholders, with control vested in managers who have small or non-existent equity
interests. In such companies there is a clear separation of ownership and
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control.7 However, such a clear dichotomy does not exist in all companies. In some
companies, where a particular shareholder or group of shareholders own a significant
percentage of the company's shares, such percentage may be sufficient, even when
not a majority interest, to give these shareholders effective control over the company
due to the diffused nature of the company's shareholders. Such shareholders who hold
a significant interest will often be part of the management. As a general rule, though,
most shareholders in public listed companies will have a relatively small number of
shares in the company and not be involved in management. Even where shareholders
or groups of shareholders have a relatively large percentage of the company's shares,
they may in some cases prefer not to be directly involved in management but to
entrust that to the care of professional managers. Thus, the distinctive feature of
publicly listed companies is that a diverse group of shareholders will entrust the
management of the company to agents, some of whom themselves may be large
shareholders.8
B An excursion into history

4 From a historical standpoint,9 it will be seen that even without anything resembling
a public listing today, wherever business enterprises
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were of a large and complex nature, the need for risk takers (shareholders today) to
delegate management to agents became necessary. The modern company can be
traced back to medieval times where it was used by ecclesiastical bodies and
boroughs. In the commercial sphere, it was also used by guilds of merchants and
craftsmen. The principal function of these bodies was to regulate the affairs of its
members. Corporate status was obtained by royal charter.10 This secured for the
borough territorial self-government from feudal lords. For the guilds, it secured a
monopoly over a trade that could be practised only by members of the guild. Members
carried on the trade on their own account or with others subject to the rules and
regulations of the guild. The guild itself as an entity was not engaged in the trade and
was principally an administrative and self-regulating organisation for that particular
trade.
5 The next stage of the development of the ‘company’ saw it evolve from one
principally interested in internal administration to one engaged in external trade. In
the sixteenth and seventeenth centuries, the crown's desire to expand foreign trade
led to charters being granted to entities that pursued commercial gain in overseas
territories. Initially, these entities were not much different from the guild associations.
Membership of the company allowed each member, subject to the rules of the
company, to pursue the overseas trade in question either on the member's own
account, or in joint account with other members. The royal charter was intended to
grant the company, and therefore its members, a monopoly over a particular aspect of
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foreign trade. It was also a means by which the crown enlisted private resources to the
king's business. Incorporators would venture their own funds for the state's ends, in
effect paying for the privilege.11 The company therefore had a strong political
dimension. As Holdsworth puts it: “It was from the point of view of trade organization
and the foreign policy of the state, rather than from the point of the interests of the
persons composing the company - from the point of view of public rather than
commercial law - that the corporate form was valued.”12
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6 However, over time the mode of engaging in business changed. This was hardly
surprising. Overseas ventures required more in the way of capital and expertise. The
risks were greater and each endeavour took a much longer time. Merchants could not
expect their wares to arrive in the marketplace within a relatively short time. Ships
could be away at sea for months and be subject to all the attendant risks then present
of sea travel. It became impractical for all but the wealthiest merchants to continue to
trade on their own account. Gradually, more and more began to trade on joint account
and with a joint stock in trade.13 Eventually, this became the only means of trading
through the company.14
7 We see in this gradual development many of the features of the modern publicly
listed company. The medieval entity had evolved into a body that traded for the
benefit of its members rather than one that merely regulated the affairs of its
members in the pursuit of a foreign commercial enterprise. The company had a
permanent joint stock that resembled the capital subscribed for in modern companies.
As private trading became forbidden, the company itself was the vehicle for the
pursuit of the monopolistic commercial enterprise. Most importantly, this in turn saw
the rise of professional management, a relatively select group of persons who in effect
managed the company. Yet it should be borne in mind that in many respects these
‘companies’ were very different from modern companies. One particularly important
difference was that many of these joint stock companies were not incorporated
companies with a separate personality but unincorporated partnerships. Legal
ingenuity enabled many of these unincorporated associations to have many of the
advantages of incorporation by the use of trusts. The company would be formed under
a ‘deed of settlement’ under which the subscribers would agree to be associated in an
enterprise with a prescribed joint stock divided into a specified number of shares. The
trust deed would specify many of the terms on which the members would associate,
including the delegation of management to a committee of directors, the vesting of
the company's property with a separate body of trustees, and how the provisions of
the deed could be varied.15 When additional capital was needed, it was raised by levies
on the existing members. The important advantage of limited liability conferred only
by incorporation does not appear to have been fully appreciated.16 However, what is
important to note was that by the end of the seventeenth century, the idea of
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combining capital with entrepreneurship was appreciated. So too was the need to
entrust management to professional agents.
8 In the first two decades of the eighteenth century, there was a speculative fervour
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that led to a bursting of the bubble in 1720. One of the most speculative enterprises,
the South Sea Company, saw its stock price collapse precipitously. Many other
companies failed completely and this led to public confidence in joint stock companies
being destroyed to the extent that it was three quarters of a century before there was
a comparable boom. Following upon this crisis, relatively few charters were given in
subsequent years as the Law Officers of the Crown were reluctant to advise the grant
of charters and insisted on restrictive conditions when any were granted.17 It was only
towards the end of the century that Parliament granted more statutory incorporations
with the growth of canal building.18
9 The events of the early eighteenth century hold an important lesson. For companies
to be effective vehicles for trade, and indeed for commerce itself to flourish, public
confidence is important. The law must ensure sufficient safeguards for all those who
would have dealings with companies, whether they are the investing members of the
public, or those who would trade with the companies themselves. To this realisation is
owed many of the features of modern company law such as prospectus requirements
in the case of public offerings of securities, continuing disclosure requirements,
accounting obligations, restrictions and obligations placed on management, a
collective insolvency regime and the pari passu principle of insolvency law, just to
name a few. Investors in companies must have confidence that the companies are well
managed before they will invest in a venture that they do not have any real control
over. Investing in such companies after all requires an act of faith. Those investing
often do not have personal knowledge of those in management. At best, they know
some of those in management by reputation, or from the media. Yet they are asked,
and are willing, to risk their capital in the enterprise. Such acts of faith may to some
extent be facilitated by faith in the process, namely that the general system of
corporate governance constitutes a check on the ability of management to abuse the
discretion vested in them.19
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C Corporate governance
10 In the case of small companies in many Commonwealth jurisdictions, many of the
safeguards required for large publicly listed companies with a diffuse shareholder base
are unnecessary. The members themselves, being intimately involved in the
enterprise, are well able to look after their own interests. Where these interests are
threatened, the law provides two important safeguards.
11 The first is that where these members are also directors, as they often will be, the
law allows them the right, in their capacity as directors, to inspect the accounting
records of the company.20 Access to information is thus an important tool by which
such shareholders can protect themselves. The second is the unfair prejudice or
oppression remedy enshrined in the companies' legislation of many common law
countries.21 This enables a shareholder who has been oppressed or unfairly
discriminated against to bring an action against the offending shareholders or
directors. If the court is satisfied that there is oppression or unfair discrimination, the
court may make such order as it thinks fit for giving relief in respect of the matters
complained of,22 or remedying the matters complained of.23
12 The two important safeguards available to shareholders in small companies are
usually not significant in publicly listed companies. Most shareholders will not be
directors and cannot therefore have recourse to the company's accounting records. As
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for the unfair prejudice or oppression remedy, while it potentially applies to all
companies,24 it will be highly difficult to persuade a court to apply it in respect of
public listed companies. In part, this is because the courts will find it difficult,
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in the case of a publicly listed company, to give effect to any legitimate expectations
that an individual investor, or a group of investors, may have. Such expectations are
more readily given effect to in quasi-partnership companies. In the case of a public
listed company, any understanding or agreement that has given rise to the
expectation will not generally be known to other investors.25 Investors in public listed
companies must have confidence that the companies' affairs will be conducted in
accordance with its constitution and not be affected by extraneous equitable
considerations and constraints.26 In addition, shareholders in public listed companies
know that there is a ready market for the shares of such companies, and that if they
are unhappy, their normal remedy is to exit the company by selling their shares, a
route not available to shareholders of unlisted companies.
13 Accordingly, two of the most widely used forms of protection for shareholders of
large publicly listed companies are corporate governance rules and disclosure
requirements.27 The former ensures (at least in theory) that management power is
subject to safeguards, and the latter ensures that shareholders have sufficient
information on which to make informed decisions on their investments; and indeed on
whether to invest, which in turn acts as a check on management. In a sense, the duty
of disclosure may be seen as an aspect of corporate governance as it generally has to
be discharged by management and is intended to provide a degree of transparency to
management actions. This paper does not intend to discuss all these aspects of
corporate governance. Its role is more modest; the focus will be on the role of
independent directors as one of the most widely advocated and used mechanisms to
strengthen corporate governance in widely held companies.28
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D Directors' fiduciary duties

14 Before considering the role of independent directors of publicly listed companies, it
will be useful to digress a little and consider the fiduciary duties that all directors owe
their companies. In all companies where there is a delegation of management to
agents and risk bearing by capital contributors, there is good reason to believe that
the agents will not always act in the best interests of their principals. The principal can
limit divergences from his interest by establishing appropriate incentives for the agent
and by incurring monitoring costs designed to limit the aberrant activities of the
agent. In addition in some instances it will pay the agent to expend resources
(bonding costs) to guarantee that he will not take certain actions to harm the
principal. Even so, there will be some divergence between the agent's decisions and
those decisions that would maximize the welfare of the principal. This is also a cost of
the agency relationship and is referred to as the “residual loss”. The monitoring
expenditures incurred by the principal, the bonding expenditures by the agent and the
residual loss are referred to as agency costs.29
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15 Under common law, directors are said to be under a fiduciary duty of loyalty and
good faith to the company. In applying this duty to directors, a number of rules have
emerged of which the two most important are: (1) that directors must act in good
faith in what they believe to be the best interests of the company; and (2) that,
without the informed consent of the company, they must not place themselves in a
position where their interests and those of the company are likely to be in conflict.30
16 Non-common law jurisdictions, while not having the concept of fiduciary duties,
have rules that fulfil a similar function. For example, the People's Republic of China's
(PRC) Company Law (Revised)31 legislation contains provisions that are similar to
those found at common law. Thus, for example, Article 59 of the PRC Company Law
(Revised) provides that the directors, supervisors and manager shall “faithfully
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perform their duties and protect the interests of the company.”32 Article 61 states that
the directors and manager “may not engage in the same type of business as their
company, whether for their own account or that of others, nor may they engage in
activities which are harmful to the interest of their company. If a director or the
manager engages in such business or activities, the revenue so obtained shall belong
to the company.”33 What is unclear though, in the absence of provisions dealing with
derivative actions, is how such a claim may be brought if the wrongdoers are
themselves in control of the company. Similarly, Indonesia's law on limited liability
companies,31A which came into force on 7 March 1996, provides at Articles 85 and 98
respectively that the Board of Directors and the Commissioners of a company are
obliged to perform their duties “with good faith and a sense of responsibility…to
further the interests and business of the company.”
17 Such duties imposed by the law on directors may be understood as a means to

reduce agency costs by subjecting directors to strict duties with appropriate penalties
for the breach of such duties. The fiduciary duties act as a counterweight to the
natural instinct of agents to prefer their own interests. They play a useful role in
defining the role of directors, and the duties that they owe. In addition, such duties,
insofar as they also play a role in deterrence, serve a purpose not unlike that of the
criminal law.
E Independent directors
18 It has been mentioned above that one way of managing the divergence of interests
between the providers of capital and management is to incur monitoring costs. One of
the roles of independent directors, indeed perhaps their main role, is to monitor
management.34 On the face
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of it, there is much to commend this idea. Independent directors are directors who are
not affiliated to executive or inside directors. In addition, independent directors should
also generally be persons who do not have a business or other relationship with the
company or with other senior officers of the company.
19 Having independent directors, at least in theory, minimises the danger of

management abusing their power.35 As such directors are not directly involved in
management, they do not have the same opportunities as management to use their
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positions as directors to their own advantage rather than to the advantage of the
company and shareholders. The role of independent directors is to monitor the actions
of management and to do this they must themselves be independent of
management.36 In the United States, many publicly listed (or traded) companies have
a majority of independent directors.37 This phenomenon is rare in Asia. In part, this is
because many publicly listed companies in
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Asia have dominant shareholders38 who essentially control the company39 and have
little incentive to weaken their control by appointing a majority of independent
directors. In addition, the market pressures that may provide incentives for such
companies to improve (or at least to appear to do so) their systems of corporate
governance, e.g. by appointing a majority of independent directors, largely do not
exist.40 Even so, to the extent that independent directors have access to information
and management, attend Board meetings and presentations, they can potentially
exercise a monitoring function even though they may not constitute a majority on the
Board of directors.41
20 While the theory seems intuitively correct, most of the studies that have been
conducted do not appear to bear it out. Bhagat and Black, for example, after surveying
much of the literature and conducting their own re-examination, conclude as follows:42
“There remains no convincing evidence that the composition of the Board of
directors affects overall firm performance. Bhagat/Black (1997) find evidence that
the proportion of inside
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directors on the Board correlates with improved performance, but this evidence is
stronger for recent past than for near-term future performance. They find that the
proportion of independent directors correlates with slower recent past growth, but not
with future performance. A null result, of course, can never be proved. But, pending
the results of additional tests…, the burden of proof should perhaps shift to those who
support the conventional wisdom that ever greater Board independence is an
important element of improved corporate governance.”
21 Similarly, Romano, who also surveys the literature, states that the bulk of the
results of various studies find insignificant associations between Board composition
and firm performance.43 Her conclusion is that Board composition does not matter for
overall performance.44 An Australian study also found no solid evidence supporting the
proposition that independent directors add value.45
22 However, Romano draws a distinction between what she terms the “strong” and
“weak” forms of a monitoring Board.46 Under the “strong” form, a monitoring Board
would be expected to enhance performance on an ordinary day-to-day basis, or over
some longer period, compared to non-monitoring (insider-dominated) Boards. Under
the “weak” form, the most effective functioning of a monitoring Board will occur upon
the appearance of significant difficulties in the firm's performance or other
extraordinary events.
23 From an intuitive point of view, it would be difficult for most independent directors
to monitor management on a day-to-day basis, or to directly enhance performance
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over a longer period. Independent directors are non-executive and cannot, in the
main, devote the greater part of their time or energies monitoring management
performance. Furthermore, independent directors do not generally have the same
degree of knowledge and expertise about the business compared to management. It
will be difficult for independent directors to make the same assessments of specific
transactions that management can. Accordingly, it is difficult for independent directors
to ‘second-guess’ management. The reality is that independent directors will, to a
large
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extent, have to be guided by the advice of management. They will be reluctant to

interfere with the views of management that are honestly held unless those views are
obviously untenable or unrealistic.
24 On the other hand, as Romano points out,47 outsiders should be able to recognise
and react to gross failures of strategy and performance, as opposed to identifying
nuances of differences in the performance of day-to-day operations. Romano surmises
that under the “weak” form hypothesis of Board impact, a positive correlation between
Board composition and performance could be expected only in times of distress.
Romano states48 that although the interaction between Board composition and specific
events is at times ambiguous, the data are most consistent with a monitoring
interpretation, i.e. that outsider Boards take greater charge in extraordinary events or
crisis situations and enhance share value. This, however, is hardly a strong vindication
of outsider Boards.49 It would be the height of negligence if such Boards did not
exercise greater oversight in extraordinary events or crisis situations. In such
instances the issues will usually be more clearly defined, thereby making it easier for
independent directors to manage the situation. What is called for is oversight of a type
that can minimise the prospect of companies (or at least the shareholders of
companies) finding themselves all too suddenly in a crisis situation.
25 There are several possible reasons for the non-correlation between the proportion of
independent directors and corporate performance. First, although independent
directors are intended to protect the interests of shareholders through their monitoring
function, they may to a greater or lesser extent owe their appointment to
management, or feel beholden to management in some way.50 This is a
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particular reality in companies where the Chief Executive Officer (or the Managing
Director) is also the controlling shareholder. Even where this is not the case, senior
management are likely at least to be consulted on Board appointments and indeed,
the Chief Executive Officer may be proactive in suggesting persons that he considers
to be suitable for appointment to the Board. This raises the fundamental issue of how
independent such directors are. Furthermore, to the extent that management has
influence over the appointment of directors, they will be inclined to encourage the
appointment of directors whom they feel would be unlikely to interfere overly with
management decisions. In the final analysis, all these factors make it very difficult to
expect that independent directors will exercise meaningful oversight of management.
Indeed, it is said that the unwillingness to challenge management by asking tough
questions is one of the shortcomings of Boards across corporate America.51 This also
appears to be the case in Singapore. It has been said that the general culture in
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Singapore is one where persons are too polite to ask the hard questions. Independent
directors may just try to please the chairman and the Chief Executive Officer and not
ask difficult questions.52
26 It is perhaps hardly surprising that there should be reluctance on the part of

independent directors to challenge management. While this may be particularly true
where the independent directors are in some way beholden to management, it is
unlikely to be limited to such instances. In the ultimate analysis, the Board of
Directors is a body where the members are generally engaged in a common enterprise.
Some degree of collegiality is therefore regarded as a necessity.53 In addition, the
dynamics within a Board will usually ensure a high degree of
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conformity among its members. As Cox and Munsinger point out,54 conformity and
cohesion within a group increase with the value each member places on membership
in the group. In the case of a directorship of a public corporation, this value is
extremely high. Individuals learning of their nomination to the Board think of the
prestige, the influence, and the pleasure of associating with other successful people
with whom they will share the challenges of being a director. Those who serve as
directors look forward to serving with others they admire, with whom they wish to
become better acquainted, and with whom they wish to work on important matters.
These preferences are a manifestation of the inherent drive for affiliation and
companionship that motivates people throughout life to seek self-identity in a group.
Through attachment to a group, individuals satisfy their needs to validate their self-
worth. Membership on the Board of a public company confers the additional reward of
increased status derived from the overall high prestige of the other board members.
The very high personal value that directors place on membership of the Board, the
enhanced self-esteem that is derived from being singled out for membership in a
select group, and the increased attention associated with continued group
membership all tend to multiply the overall cohesion of the group. Furthermore, many
outside directors of companies are themselves top managers of other companies. This
interlocking directorate has been seen as an instrument for cementing ties between
firms. Another reason has been to enable companies to ensure that their managers
remain full abreast of the changing corporate environment and practices of other
companies.55 Accordingly, in the circumstances, it is extremely likely that there will be
a great reluctance to adopt an approach that may be construed or perceived as
confrontational.
27 Secondly, many independent directors are appointed to add lustre and prestige to
the Board. They tend to be busy, successful individuals who already hold a number of
other similar positions. The amount of time that they can bring to bear on the
company's affairs will be limited. This problem is compounded where the companies in
question are engaged in highly technical industries that the independent directors may
have very little knowledge of. In such a situation, it will be extremely difficult for the
independent directors to play a useful role in Board deliberations. Often, the
independent directors will have little
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choice but to rely on the judgement of management.56 After all, statistics and
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information can only take a Board so far, assuming in the first place that there has
been complete disclosure of all relevant facts. At the end of the day, when important
strategic decisions have to be taken, judgement must be exercised. Without the
background or experience that comes from many years in a particular field or industry,
the best that can probably be expected of independent directors insofar as the
decision-making process is concerned is that they may prevent extremely poorly
conceived ideas.57
28 A third reason is offered by Bhagat and Black.58 They suggest that different
companies benefit from different Board structures. For example, slowly growing
companies may need a high proportion of independent directors to control
management's tendency to reinvest the company's cash flow even when there are few
if any reinvestment opportunities. Optimal Board composition could also vary
according to the principal industry that the company is engaged in.
29 A fourth possibility, also offered by Bhagat and Black, is that independent directors
can add value, but only if they are embedded in an appropriate committee structure.59
This would let independent directors perform the monitoring function. However, most
large companies already have such committee structures, and another study finds
little evidence that the principal outsider-dominated ‘monitoring’ committees affect
performance.60
30 The fifth possibility has already been alluded to above, namely the imbalance in
knowledge and expertise relative to the company and its various businesses places a
significant advantage in the hands of management.61 In addition, management has at
its disposal the entire
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administrative machinery of the company. Accordingly, independent directors cannot

help but be dependent on management. Independent directors have little choice in
general but to proceed on the basis that management is acting in good faith and to act
on the basis of such information as is provided to them by management. If
management does not so act, independent directors will be handicapped and unable to
fulfil their monitoring function effectively. In this regard, the Australian case of AWA
Ltd v. Daniels62 provides a useful case study.
31 In AWA, the plaintiff company purchased foreign currency contracts to cover its
exposure to foreign currency fluctuations that arose in relation to the contracts it had
in place for goods it imported. However, its foreign exchange (FX) dealings developed
beyond risk management so that in the 1986-87 financial year, 25% of its profit was
budgeted to come from its managed hedging activities. In 1985 Koval, an employee of
the plaintiff was appointed its FX manager and he appeared to be very successful. The
reported profit for the 8 months of the financial year to February 1987 apparently
exceeded budget by 400%. Koval was permitted by the plaintiff's management to
operate without effective control and supervision. There was a general absence of a
proper system of books and records and other internal controls, and no effective
dealing limits. Unfortunately, Koval had generally disclosed the contracts showing a
profit only. Loss-making contracts were not disclosed and the plaintiff claimed that
Koval's activities in fact led to a loss of AUD$49.8 million from its FX transactions. In a
suit brought against the auditors for negligence, the auditors claimed contributory
negligence alleging, inter alia, that the directors were themselves negligent.
32 Rogers CJ held that the non-executive directors were not negligent.63 The loss
arose through the incompetent implementation by senior management of the project
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for risk management. The nonexecutive directors were entitled to rely on management
whose trustworthiness they had no reason to doubt. Management had not complied
with the Board's general direction that the FX activities were to be related to the
plaintiff's underlying exposure to foreign currency fluctuations and not for speculative
purposes. The non-executive directors were also not advised by senior management on
a number of important matters such as the deficiencies in internal controls and
accounting systems. There was no evidence to suggest that the non-
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executive directors ever became aware, or should have become aware, of the
deficiencies in internal controls and books of account. They had no reason to believe
that their policy of no risk and of management of hedges related to underlying
exposures was not being observed rigorously. They relied and were entitled to rely on
management and the auditors. When particularly large profits on the FX activities was
realized, the non-executive directors were understandably concerned but had been
assured by the auditors that the profits reported were genuine. Having regard to the
limited knowledge that the non-executive directors had because of the concealment of
management, it could not be said that they were negligent.
33 The AWA case provides a salutary example of how difficult it will be for
independent directors to perform their monitoring function if management is not
honest and open with them. At the same time, it also showed a certain timidity on the
part of the Board in the pursuit of matters of concern that may be typical of many
other Boards. On appeal, Clarke and Shellar JJA opined that a puzzling feature of the
case was that a logical explanation for the huge increase in profits would be that there
was a high level of trading in FX. It seemed natural that the directors should know of
or suspect this.64 Although both judges went on to say that the other surrounding
circumstances absolved the nonexecutive directors from blame, it would not be
unreasonable to think that the non-executive directors were somewhat lacking in this
aspect of their monitoring function.
34 It is suggested that to a large extent the inadequacy, in practice, of the monitoring
function that independent directors are supposed to play, is attributable to the
evolution of the basic structure of corporate governance. From a historical perspective,
it is clear that corporate law long ago favoured business arrangements that centralized
decision-making.65 In England, this was certainly evident from early company law
cases that held that where the articles have vested the power of management in the
Board of Directors, shareholders could not overrule management decisions made by
the Board.66 This position was arrived at
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notwithstanding even earlier authority that suggested otherwise.67 Thus in Shaw &
Sons (Salford) Ltd v. Shaw, Greer LJ succinctly expressed the point as follows:68
“A company is an entity distinct alike from its shareholders and its directors.
Some of its powers may, according to its articles, be exercised by directors, certain
other powers may be reserved for the shareholders in general meeting. If powers of
management are vested in the directors, they and they alone can exercise these
powers. The only way in which the general body of the shareholders can control the
exercise of the powers vested by the articles in the directors is by altering their
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articles, or, if opportunity arises under the articles, by refusing to re-elect the
directors of whose actions they disapprove. They cannot themselves usurp the
powers which by the articles are vested in the directors any more than the directors
can usurp the powers vested by the articles in the body of shareholders.”
35 What is significant about these cases is that the conclusion arrived at appears to be
contrary to the language of the articles in question. In the English cases, the articles
that vested the power of management in the Board used language similar to that
found in versions of Table A prior to the English Companies Act 1985.69 The relevant
provision in Table A provided that the business of the company would be managed by
the directors but that this would be “subject nevertheless to any regulation of these
articles, to the provisions of the Act and to such regulations, being not inconsistent
with the aforesaid regulations or provisions, as may be prescribed by the company in
general meeting”.
Page: 375
36 A literal interpretation of the relevant Table A article, and indeed of the clauses in
the cases discussed, points strongly to the conclusion that the “regulations” that “may
be prescribed by the company in general meeting”, are a reference to ordinary
resolutions passed by the shareholders in general meeting. As such, these
“regulations” that are prescribed by the shareholders could not be inconsistent with
“any regulation of these articles”, which would have necessitated a special resolution
to alter.70 This interpretation was in fact arrived at in the Singapore decision of Credit
Development v. IMO.71 It is submitted that as an exercise in interpretation, the result
in Credit Development v. IMO cannot be faulted. Ultimately, it is suggested that the
courts in England arrived at a different conclusion because of a conscious preference
for a policy of strong centralised management within companies.72 Although
approached at as a matter of interpretation, it would appear that only very explicit
language in the articles that would admit of no ambiguity whatsoever would lead the
courts to conclude that the body of shareholders in general meeting is the organ
within the company that is superior to the Board of Directors.73 As Buckley LJ put it in
Gramophone and Typewriter Ltd v. Stanley:74
“This court decided not long since, in Automatic Self-Cleansing Filter Syndicate
Co. Ltd. v. Cuninghame [1906] 2 Ch. 34, that even a resolution of a numerical
majority at a general meeting of the company cannot impose its will upon the
directors when the articles have confided to them the control of the company's
affairs. The directors are not servants to obey directions given by the shareholders
as individuals; they are not agents appointed by and bound to serve the
shareholders as their principals. They are persons who may by the regulations be
entrusted with the control of the business, and if so entrusted they can be
dispossessed from that control only by the statutory majority which can alter the
articles. Directors are not, I think, bound to comply with the directions even of all
the corporators acting as individuals.”
Page: 376
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37 Not only did Company Law favour centralised decision-making, it also allowed the
Board of Directors to delegate authority to designated officers of the company, or to
sub-committees of the Board. Although agency law generally prohibits delegation of
authority, this was justifiable on the organic theory of company law, which regards the
Board as an organ of the company and not merely an agent.75 From the outset, the
company was an instrument to provide firm central direction for the enterprising use
of pooled assets.76
38 With the centralization of corporate decision-making, it was inevitable that as
companies grew in size and scope, the greater influence would eventually repose in
the managers of the company as opposed to the Board as a whole. Although
companies were seen as analogous to the state,77 and were structured along
democratic lines,78 what has instead
Page: 377
occurred has been the transfer of the leadership function from owners (and it might be
added, the Board as a whole) to executive directors and other salaried managers.79
With directors generally not being subject to shareholder control save for the (often)
theoretical right to deny reelection, it is unsurprising that directors, whether executive
or not, feel only a tenuous connection with the shareholder body. In turn, the Board
itself has declined as an active and independent decision-making body.80 One
commentator has gone so far as to say that the claim that the separation of corporate
management and power would guard against untrammelled power has managed to
facilitate the opposite result. As corporations come to resemble large-scale
bureaucracies more than commercial entrepreneurs, corporate managers begin to
maximise their own utility and not the company's profits; they are as much the
scriptwriters of the economic drama as the actors in its unscripted performance.81 This
has led to calls from time to time for a strengthening of the political process and
shareholder democracy within companies.82
39 Accordingly, in the final analysis, and herein lies the paradox, with the leadership
function firmly entrenched with management, in the absence of an overhaul of the
system, independent directors can discharge their monitoring functions effectively only
if management itself is committed to the role of such directors. This is particularly the
case where companies do not have Boards with a majority of
Page: 378
independent directors. Even where Boards with a majority of independent directors

appear to add value to the company, Romano concedes that the observed effect of
Board composition could be spurious because such performance could be a function of
the quality of management itself. If high quality managers are more likely to place
outsiders on Boards than poor quality managers who do not want to be monitored, a
finding that shareholders are better served by outsider-dominated Boards is simply an
illustration of the better management of these companies.83 To this it should be added
that high quality managers appreciate the valuable role of independent directors and
will take steps to allow them to play their role effectively.84 As Fama and Jensen point
out, internal managers can use their knowledge of the organization to nominate
outside Board members with relevant complementary knowledge: for example,
outsiders with expertise in capital markets, corporate law, or relevant technology who
provide an important support function to the top managers in dealing with specialized
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decision problems.85
40 The importance of this cannot be overstated. There is a tendency to think that

simply having independent directors improves corporate governance. The reality is
sometimes the opposite. Unless there are independent directors who are truly
independent, and have the strength of character and ability to perform an effective
monitoring function, the presence of independent directors acts as a smokescreen and
a snare for the unwary investor who may pay a higher price for equity on the basis of a
supposedly better corporate governance structure.86 Good corporate governance is not
about having a certain number of independent directors, of the number of Board
meetings in a year, or even about whether there are Board committees that have a
majority of independent
Page: 379
directors. These tell us only about structures and while relevant, does not provide the
more important information about how the independent directors or the Board really
operate.
41 One study purports to show that independent directors can make a difference
where the Board is truly independent, has adopted a professional culture, and is
therefore a well-governing Board. In their article,87 Millstein and MacAvoy assert that
while management used to dominate Boards, in the 1990s Boards of Directors of large
publicly traded companies have begun to address their passivity and dependence. This
appears to have arisen largely due to efforts to address or avoid serious performance
problems associated with managerial entrenchment. Members of Boards responded to
increasing pressures from various quarters including institutional investors, active
investors, judicial intervenors, and media attacks. The latter caused directors to be
concerned about their reputations and these have all led to directors monitoring
management more actively.88
42 Millstein and MacAvoy go on to say that many Boards of large companies operate in
a different mode than they did a few short years ago. For most large, publicly traded
corporations, a majority of directors are not members of management. For trend-
setting corporations, new independent directors are selected in consultation with
management by a wholly independent Board committee such as the “nominating” or
“governance” committee. Most important, Board participation in agenda setting and in
determining information flow is more active. There are also executive sessions of
independent directors, separate from management, to evaluate management.
Although few Boards have gone so far as to embrace the separation of the roles of the
Chairman of the Board and the Chief Executive Officer, some companies have created
a leader of the independent directors (a “lead director”) or some other non-
management Board leadership position, or have designated a “special-purpose” lead
director for a specific task. According to Millstein and MacAvoy, this change in the role
of the Board means that a search for proof that good governance improves
performance based on data from the 1970s and 1980s cannot lead to the conclusion
that Boards cannot be relied upon to motivate management to improve corporate
performance.89
43 Having set out their essential premise, both authors go on to identify certain
acceptable surrogates (short of being present at all Board
Page: 380
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meetings to observe and record the Board proceedings) that are indicative of
professional Boards that recognise their unique function distinct from management
and that assert control over processes to maintain independence.90 These acceptable
surrogates include independent Board leadership, periodic meetings of the
independent directors without management present, and formal rules or guidelines for
the relationship between the Board and management. These surrogates have
structural characteristics, but to the authors, they more directly indicate Board
behaviour from which can be inferred Board independence. Each of these surrogates is
a departure from the traditional system that allows the Board to be dominated by
management. The presence of all or even any one of these surrogates is, to the
authors, indicative that traditional Board culture has been displaced in favour of an
independent and professional approach in Board decisions.
44 Millstein and MacAvoy conclude that their studies of companies in the first half of
the 1990s showed a statistically significant relationship between an active
independent Board and superior corporate performance as measured by earnings in
excess of costs of capital over the industry average.91 They assert that this research
demonstrates a substantial and statistically significant correlation between an active,
independent Board and superior corporate performance. They believe that such
superior performance is a result of activist corporate governance.
45 The views expressed by Millstein and MacAvoy appear somewhat over-optimistic.
While market pressures may certainly give independent directors greater incentive to
take their monitoring roles seriously, it has already been mentioned in an earlier part
of this article the considerable difficulties that independent directors face in
discharging such a role adequately.92 The existence of lead directors (or even the
separation of the roles of Chairman and Chief Executive Officer), separate meetings
without management being present, or rules and guidelines that regulate the
relationship between the Board and management, cannot adequately address the real
difficulties that Boards face in the monitoring of management. The existence of such
“surrogates” or structural mechanisms may be an indication of the good
Page: 381
intentions of the Board. Whether these good intentions have been turned into reality is
a completely different proposition. While it is difficult to fault the view that
independent directors can make a difference where the Board is truly independent, has
adopted a professional culture, and is therefore a well-governing Board, the slew of
corporate scandals that engulfed the United States in the last two years casts
considerable doubt on Millstein and MacAvoy's central premise that there has been a
fundamental shift in corporate governance in the 1990s. Instead, it is widely perceived
today that Chief Executive Officers may have become too powerful in the 1990s and it
is necessary to strengthen the role of independent directors. To this difficult issue the
article now turns.
F Strengthening the role of independent directors

46 In light of the corporate difficulties in the United States, the issue of good
corporate governance has once again been brought to the forefront.93 In the United
States, the New York Stock Exchange (“NYSE”) Corporate Accountability and Listing
Standards Committee submitted a report to the NYSE's Board of Directors on 6 June
2002.94 The report made recommendations to amend the NYSE's listing standards with
the goal of enhancing the accountability, integrity and transparency of the NYSE's
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listed companies and was accepted by NYSE Board of Directors on 1 August 2002.95 In
England, Mr Derek Higgs was asked to lead an independent review of the role and
effectiveness of non-executive directors. In Mr Higgs' consultation paper dated 7 June
2002,96 he stated that the preferred starting point would be an approach based on
best practice rather than regulation or legislation.97 On its part, Singapore has
established a Council on Disclosure and Corporate Governance that will be an
independent body overseeing corporate governance rules and accounting standards.
Page: 382
47 It is suggested that if independent directors are still to be considered an important

aspect of good corporate governance,98 two crucial elements are necessary. First, there
is a need to ensure that independent directors are truly independent. Secondly, it is
crucial that the company's external ‘independent’ auditors perform their supporting
roles.99
48 In theory, directors are elected by shareholders. However, in practice, the right of
shareholders to elect directors is not meaningful. It is unrealistic to expect the vast
majority of shareholders who have small stakes in the publicly listed company to take
steps to propose directors for election at a general meeting. Nor, unlike the state, is
there an alternative slate of directors that may be a potential government in waiting.
The ostensible democratic process built into the corporate structure is thus
characterised by both apathy and a complete lack of any alternative. What happens in
practice is that management, or the Board itself (or the Nominating Committee of the
Board), will put forward candidates for election or re-election as a director. This
coupled with control of the proxy voting mechanism, makes such election or reelection
a mere formality. The process bears no meaningful semblance to any concept of
democracy.100
49 As indicated earlier, this manner in which directors are elected casts some
presumptive doubt on how independent non-executive
Page: 383
directors are. It cannot be doubted that management is materially involved in the

process for selection of many of the persons whose names are put forward for
nomination as directors at general meetings. To strengthen director independence, the
NYSE report of 6 June 2002 has recommended tightening the definition of
“independent” director.101 Such directors should have “no material relationship with
the listed company (either directly or as a partner, shareholder or officer of an
organization that has a relationship with the company).” Specific cases where directors
will not be considered independent include a person who is a former employee of the
listed company until five years after the employment has ended, and a person who is,
or in the past five years has been, affiliated with or employed by a present of former
auditor of the company (or of an affiliate) until five years after the end of either the
affiliation or the auditing relationship.102
50 In similar vein, on 30 July 2002, President George W Bush signed into law the
Sarbanes-Oxley Act of 2002.103 Section 301 of the Act amends section 10A of the
Securities Exchange Act of 1934 to set out standards relating to audit committees. It
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provides, inter alia, that each member of the audit committee shall be independent
and that to be considered independent, the member may not accept any consulting,
advisory or other compensatory fee from the company, or be an affiliated person of the
company or any subsidiary thereof. In addition, each audit committee shall have the
authority to appoint independent counsel and other advisers that it determines are
necessary for it to carry out its duties. The company shall provide appropriate funding,
as determined by the audit committee, to pay the fees of such advisers, as well as the
fees of the accounting firm rendering the audit. The auditors shall report in a timely
fashion to the audit committee all critical accounting policies and practices to be used;
all alternative treatments of financial information within generally accepted accounting
principles that have been discussed with management, ramifications of the use of such
alternatives, and the
Page: 384
treatment preferred by the auditors; and any material written communications

between the auditors and management.104
51 In England, the Combined Code105 states that non-executive directors should

comprise not less than one-third of the Board. The majority of non-executive directors
should be independent of management and free from any business or other
relationship that could materially interfere with the exercise of their independent
judgment. In Singapore, its Code of Corporate Governance106 provides that there
should be a strong and independent element on the Board, with independent directors
making up at least one-third of the Board. An “independent” director is one who has
no relationship with the company, its related companies 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.
Examples of such relationships, which would deem a director not to be independent,
include a director that has been employed by the company or any of its related
companies for the current or any of the past three financial years; a director who has
an immediate family member who is, or has been in any of the past three financial
years, employed by the company or any of its related companies as a senior executive
officer whose remuneration is determined by the remuneration committee; a director
accepting any compensation from the company or any of its related companies other
than compensation for Board service for the current or immediate past financial year;
or a director being a substantial shareholder of or a partner in (with 5% or more
stake), or an executive officer of, any for-profit business organisation to which the
company made, or from which the company received, significant payments in the
current or immediate past financial year. 107
52 Useful though these provisions are, it is suggested that they should go further.108
To ensure that independent directors are truly
Page: 385
independent, certain third parties, whether an industry body,109 or a panel appointed

by the stock exchange or securities regulator110 should be given locus standi to
nominate directors. Such a third party should also be tasked with the role of building
up a comprehensive database of potential candidates for directorships in order to fulfil
its function.111 Shareholders will ultimately be responsible for the election of the
persons nominated.112 If they feel that some or all the persons nominated are
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unsuitable, it is their prerogative to reject them.113 The appropriate
Page: 386
disclosures should then be made and in the event that some or all the nominees are
rejected, so be it. As long as there is disclosure of such fact, the market can take this
into account and react accordingly.
53 One criticism of this proposal may be that such a structure may lead to a loss of
collegiality. In addition, senior management of companies must necessarily have
discretion to manage the company's affairs. A Board that is constantly looking over the
shoulders of senior management may constrain them from taking appropriate risks in
a timely fashion. It is suggested that these concerns are overblown. It is unlikely that
many independent directors will approach their role in an overbearing, adversarial
fashion, particularly when the company is doing well. As Gilson and Kraakman put
it,114 there is no reason to lament the possible loss of collegiality. If a company were
performing well, open discussion would strengthen director relationships. It would give
management the satisfaction of receiving support and approval for its achievements
from a truly independent Board. Alternatively, if a company were performing poorly,
decorous collegiality would have no place in the Boardroom. In such a case,
management should be compelled to account for its performance and address
alternative strategies because it would have lost its only legitimate basis, namely
success, for expecting deference from the Board. Furthermore, such a criticism also
stems from the (understandable) reluctance of senior management to have to work
within a new paradigm. Senior management will have become accustomed to working
with largely toothless independent directors, who are often tacit allies. The prospect of
having to rigorously justify Board proposals must therefore be somewhat unpalatable.
In the longer term though, this will surely be in the interests of the company.
54 Recognising the importance of the nominating process for directors, the US
Securities and Exchange Commission (“SEC”) has proposed new disclosure
requirements that would expand disclosure in company proxy statements regarding
the nominating committee and the
Page: 387
nominating process.114A This enhanced disclosure is intended to provide security

holders with additional, specific information upon which to evaluate the boards of
directors and nominating committees of the companies in which they invest. Further,
the SEC intends that increased transparency of the nominating process will make that
process more understandable to security holders. One key proposal is that if the
nominating committee of a company has a policy with regard to the consideration of
any director candidates recommended by security holders, there should be a
description of the material elements of that policy, which shall include, but not be
limited to, a statement as to whether the committee will consider director candidates
recommended by security holders. Similarly, if there is no such policy, this should be
stated. Where the nominating committee will consider candidates recommended by
security holders, the procedures to be followed by security holders who wish to
nominate a candidate should be described together with any minimum qualifications,
or specific skills or qualities which the nominating committee believes that a director
of the company should possess.
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55 In addition, the SEC has also proposed that the company should describe the
nominating committee's process for identifying and evaluating nominees for director,
including nominees recommended by security holders, and any differences in the
manner in which the nominating committee evaluates nominees for director based on
whether or not the nominee is recommended by a security holder. There should also
be a statement of the specific source, such as the name of an executive officer,
director, or other individual, of each nominee (other than nominees who are executive
officers or directors standing for reelection) approved by the nominating committee for
inclusion on the company's proxy card. Should the nominating committee (a) receive a
recommended nominee from a security holder or group of security holders who
individually, or in the aggregate, beneficially owned greater than 3% of the company's
voting common stock for at least one year as of the date of the recommendation, and
(b) the nominating committee decides not to nominate that candidate, there should
be disclosure of the names of the security holder(s) who nominated the candidate, and
the reasons why the nominating committee did not include the candidate as a
nominee. Where directors are to be appointed, the company should include in the
proxy materials a statement as to whether or not the
Page: 388
company's board of directors provides a process for security holders to send

communications to the board of directors and, if the company does not have a process
for security holders to send communications to the board of directors, a statement of
the specific basis for the view of the board of directors that it is appropriate for the
company not to have a such a process.
56 If all this is seen as too radical, it is suggested that as a minimum (and perhaps
this is just as radical), the auditors of all public listed companies should be appointed
by an industry body,115 a panel appointed by the stock exchange that the company is
listed on, the stock exchange itself, or the securities regulator.116 It is suggested that
one of the principal reasons why some auditing firms were implicated in one or the
other of the scandals affecting a number of public listed companies in the United
States was due to the close relationship between management and the ostensibly
independent auditors. Accounting firms are too beholden to management for their
appointment even though they are in theory (again) appointed by the shareholders.
Their independence is also potentially compromised by the lucrative consulting and
other services that they provide to their audit clients.117 Prohibiting auditing firms from
providing consulting or other services to their auditing clients will go some way to
restoring auditor independence118 but is unlikely of itself to solve the problem entirely.
In fact, it is likely to increase their
Page: 389
dependence on audit work119 and it is therefore crucial that their independence from
management be fortified.120
57 Under such a proposal, shareholders would no longer be required to go through the

meaningless charade each year of appointing or re-appointing external auditors, which
is a matter that management has control over through their control of the proxy
process. The task of retaining and terminating the company's independent auditors
will rest solely with the external third party. This third party may, in the first instance,
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allow existing engagements to continue. Adjustments will be made over time with
firms that under-perform being appointed to fewer audits. In all other respects, the
independent auditors will work with the Board and in particular, the audit committee
of the Board. The fact that another body is determining their appointment and
retention other than the directors will mean that the independent auditors will be less
susceptible to pressure from management. At the same time, as this author is
somewhat sceptical of the degree of independence of outside directors as a whole as
presently constituted, it is suggested that the recommendation in the NYSE report of 6
June 2002 does not go far enough. In that report, one of the specific sub-
recommendations found under Recommendation 7 states that one of the duties and
responsibilities of the audit committee must be to retain and terminate the company's
independent auditors. While this recommendation is to be welcomed, unless
independent directors are in the first instance nominated by a third party as suggested
earlier and duly elected, or their independence is in some other way secured, it would
be preferable to locate the hiring and firing of the independent auditors outside both
management and the Board structure.121 By ensuring the likelihood of
Page: 390
truly independent auditors, Boards of Directors will in turn be better able to discharge
their duties to their companies. Outside directors may not have the same technical
and informational knowledge that management has, but they should at a minimum be
presented with financial statements with a high probability of accuracy. Had this been
done, the corporate crisis of 2002 in the United States may well not have occurred.
G Conclusion
58 Notwithstanding the views of Millstein and MacAvoy, there is reason to be sceptical
of the extent of the utility of independent directors and indeed, most of the studies do
not show any correlation between independent directors and company performance.
Nor, it is suggested, is there any real evidence that independent directors fulfil their
monitoring function well. This is not to say that there do not exist independent
directors who play their role well; independent directors who are independent and who
take the trouble to understand the company and the business sector that it operates
within. However, what studies and practice appear to show is that the effect of having
independent directors is at best patchy. Nevertheless, independent directors are likely
to continue to be regarded as being crucial to good corporate governance. For one,
many institutional investors appear to regard the absence or presence of independent
directors as crucial to their investment decisions.122 Secondly, the requirement of
independent or non-executive directors is often seen as an indicator of a regulator or
stock exchange's commitment to international regulatory standards. Accordingly,
whatever their actual utility, it would be considered a retrograde step not to at least
presumptively require independent directors for publicly listed companies. Any
jurisdiction that does not stipulate the need for independent directors may find itself
unable to attract capital to its
Page: 391
securities markets.123 In the competitive global marketplace for capital, this is

something that no jurisdiction can afford.124 Accordingly, since there are pragmatic
reasons for independent directors, steps should be taken to increase the likelihood of
their independence.
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59 It has been suggested here that to do this effectively, independent directors should
be nominated by a third party, either an industry body or a panel established by the
stock exchange or securities regulator. If this is unacceptable, at the very least auditor
independence should be secured by locating the power to retain and remove
independent auditors in a third party. This will reduce the pressure that management
can bring to bear on the independent auditors. Should management, or indeed the
Board as a whole, feel that there are good reasons for a change of auditors, it ought to
be open to them to persuade the third party that the auditors be removed and that
another firm be appointed in their place.
TAN CHENG HAN*
———
1 Unless the court engages in what is known as ‘lifting’ or ‘piercing’ the corporate veil, a process by which the
court looks beyond the company to the shareholders of the company for liability, see generally PL Davies,
Gower's Principles of Modern Company Law (London, Sweet & Maxwell, 6th ed., 1997), Chapter 6; Schmitthoff,
“Salomon in the Shadow” [1976] Journal of Business Law 305; M Whincup, “‘Inequitable Incorporation’ - the
Abuse of Privilege” (1981) 2 Company Lawyer 158; P Carteaux, “Louisiana Adopts a Balancing Test for Piercing
the Corporate Veil” (1984) Tulane Law Review 1089; F Easterbrook and D Fischel, “Limited Liability and the
Corporation” (1985) 52 University of Chicago Law Review 89; A Domanski, “Piercing the Corporate Veil - A New
Direction?” (1986) 103 South African Law Journal 224; S Ottolenghi, “From Peeping Behind the Corporate Veil to
Ignoring it Completely” (1990) 58 Modern Law Review 338; Tan CH, “Piercing the Separate Personality of the
Company: A Matter of Policy?” [1999] SJLS 531-551.
2
For example, Singapore amended its Legal Profession Act (Cap. 161) in 2000 (see Legal Profession Amendment
Act 2000), which introduced a new Part VIA that allows advocates and solicitors to practise through a “law
corporation” and not only as a firm.
3 In England, for example, any two or more persons (individuals or companies) may form a limited liability
partnership. Such partnerships are not limited to the professions. Notwithstanding its name, this vehicle is in
effect a modified form of private company and not a partnership with limited liability, as it is in some other
jurisdictions, see G Morse, Partnership Law (London, Blackstone Press, 5th ed., 2001), Chapter 9. Singapore is
also considering the introduction of limited liability partnerships, although it is not clear yet whether Singapore
will choose limited liability partnerships similar to the English model, or partnerships with limited liability. The
former seems more likely although this author considers it a retrograde step.
4 See RCI Banks, Lindley & Banks on Partnership, (London, Sweet & Maxwell, 18th ed., 2002), 33.
5
See e.g., Ebrahimi v. Westbourne Galleries Ltd [1973] AC 360; Re Central Realty Co (Pte) Ltd [1999] 1 SLR
559; Wu Fu Ping v. Ong Beng Seng [2001] 2 SLR 40.
6 Ebrahimi v. Westbourne Galleries Ltd, ibid, 379.
7 See A Berle and G Means, The Modern Corporation and Private Property (New York, Harcourt, Brace & World
Inc, 1932, revised edition, 1967).
8
R La Porta, et al, “Corporate Ownership Around the World” (1999) 54 Journal of Finance 471, find that the Berle
and Means widely held corporation is only a common organizational form for large firms in the richest common law
countries. As one looks outside the United States, particularly at countries with poor shareholder protection,
even the largest firms tend to have controlling shareholders. Sometimes that shareholder is the State; but more
often it is a family, usually the founder of the firm or his descendants.
9 For further reading, see Gower's Principles of Modern Company Law, supra note 1, chapters 2 and 3; W
Holdsworth, A History of English Law (London, Methuen and Sweet & Maxwell, 1966), Volume VIII, 192-222; TB
Napier, “The History of Joint Stock and Limited Liability Companies” in A Century of Law Reform: Twelve Lectures
on the Changes in the Law of England During the Nineteenth Century (London, Macmillan, 1901), Chapter XII; BC
Hunt, The Development of the Business Corporation in England: 1800 - 1867 (Cambridge, Massachusetts,
Harvard University Press, 1936); CA Cooke, Corporation Trust and Company: An Essay in Legal History
(Manchester, Manchester University Press, 1950); A Chayes, “The Modern Corporation and the Rule of Law” in
ES Mason (ed), The Corporation in Modern Society (Cambridge, Massachusetts, Harvard University Press, 1966),
25, 32-7; JW Hurst, The Legitimacy of the Business Corporation in the Law of the United States: 1780 - 1970
(Charlottesville, The University Press of Virginia, 1970); LM Friedman, A History of American Law (New York,
Simon and Schuster, 1973), Part III, Chapter VIII; WR Cornish and GN Clark, Law and Society in England: 1750 -
1950 (London, Sweet & Maxwell, 1989), 246-62; F Evans, “The Evolution of the English Joint Stock Limited
Trading Company” (1908) 8 Columbia Law Review 339; M Schmitthoff, “The Origin of the Joint-Stock
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Company” (1939) 3 University of Toronto Law Journal 74; W Horrwitz, “Historical Development of Company
Law” (1946) 62 Law Quarterly Review 375.
10 In later times Parliament secured power to grant its own charters.
11
Chayes, supra note 9, 34.
12 Supra note 9, 202.
13 From where the term ‘joint stock company’ originates.
14
See e.g., the evolution of the East India Company, Cooke, supra note 9, 58-9.
15 Gower's Principles of Modern Company Law, supra note 1, 29.
16 Ibid, 21-2.
17
Gower's Principles of Modern Company Law, supra note 1, 27-8.
18 Ibid.
19 FH Easterbrook and DR Fischel, “The Corporate Contract” (1989) 89 Columbia Law Review 1416, 1419-21.
20
See the English Companies Act 1985, s. 222. It has been suggested that s. 222 gives directors a statutory
right to an order for inspection of the accounting records of the company, see DD Prentice, “A Director's Right of
Access to Corporate Books of Account” (1978) 94 Law Quarterly Review 184 and Berlei Hestia (NZ) Ltd v.
Fernyhough [1980] 2 NZLR 150. The position in Singapore is governed by s. 199(5) of the Singapore Companies
Act (Cap. 50), which explicitly states that “[t]he Court may in any particular case order that the accounting and
other records of a company be open to inspection by an approved company auditor acting for a director, but
only upon an undertaking in writing given to the Court that information acquired by the auditor during his
inspection shall not be disclosed by him except to that director”; see also Wuu Khek Chiang George v. ECRC Land
Pte Ltd [1999] 3 SLR 65.
21
See e.g., s. 459 of the English Companies Act 1985, and s. 216 of the Singapore Companies Act.
22
English Companies Act 1985, s. 461(1).
23
Singapore Companies Act, s. 216(2).
24 Re a Company (No. 00314 of 1989) [1991] BCLC 154.
25 Re Blue Arrow plc [1987] BCLC 585; Re Tottenham Hotspur plc [1994] 1 BCLC 655.
26
Re Astec (BSR) plc [1998] 2 BCLC 556, 589, where the court also expressed the view that the concept of
legitimate expectations should have no place in the context of public listed companies. See also E Ferran,
Company Law and Corporate Finance (Oxford, Oxford University Press, 1999), 239-40.
27 Including auditing requirements. In this regard, Singapore's Monetary Authority of Singapore announced on 13
March 2002 that all banks in Singapore will be required to change their auditors after 5 years. This may well
presage a move to require all publicly listed companies in Singapore to do the same. An editorial in The
Economist, “Unresolved Conflicts”, 18 October 2003, 14, supports auditor rotation on the basis that it will go a
long way toward making auditors genuinely independent. Although this may be a step in the right direction, more
will have to be done to ensure that auditors perform their role adequately.
28 Although some mention will be made of auditors, as they play a crucial role in enabling independent directors
to discharge the functions expected of them.
29
MC Jensen and WH Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership
Structure”, in RA Posner and KE Scott (eds), Economics of Corporation Law and Securities Regulation (Boston,
Little, Brown, 1980), 39, 39-40.
30 See Gower's Principles of Modern Company Law, supra note 1, 599-601.
31Adopted by the 5th Session of the Standing Committee of the 8th National People's Congress on 29 December
1993, which became effective on 1 July 1994.
32
This English translation is taken from China Law Reference Service, Volume 2 (Hong Kong, Asia Law & Practice,
1996), 14-5.
33 Other relevant articles are Articles 60, 62 and 63.
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31AUndang Undang Tentang Perseroan Terbatas. The translation is taken from BS Tabalujan, Indonesia Company
Law - A Translation and Commentary (Singapore, Sweet & Maxwell Asia, 1997).
34
Another possible important role for independent directors may be to provide the full time executives with
advice and counsel on matters of corporate policy and strategy, see BR Cheffins, Company Law: Theory
Structure and Operation (Oxford, Clarendon Press, 1997), 604-5. Obviously, the ability of independent directors
to play this role meaningfully varies from person to person and on the industry that the company operates in.
Independent directors no doubt offer advice on matters of corporate policy and strategy but it is debatable how
significant their advice is, particularly where they do not have the relevant industdddry particularly where they
do not have the relevant industry experience. As Rogers CJ put it in AWA Ltd v. Daniels (1992) 7 ACSR 759, 832:
“Foremost among [the difficulties that arise in the allocation of liability] is the failure to recognise and admit that
many companies today are too big to be supervised the administered by a board of directors except in relation to
matters of high policy. The true oversight of the] activities of such companies resides with the corporate
bureaucracy. Senior management and, in the case of mammoth corporations, even persons lower down the
corporate ladder exercise substantial control over the activities of such corporations involving important
decisions and much money. It is something of an anachronism to expect non-executive directors, meeting once a
month, to contribute anything much more than decisions on questions of policy and, in the case of really large
corporations, only major policy. This necessarily means that, in the execution of policy, senior management is in
the true sense of the word exercising the powers of decision and of management which in less complex days
used to be reserved for the board of directors.” Later in the judgement, at 865, Rogers CJ expressed the view
that as “conglomerates get larger and more complex it becomes almost impossible for the non-executive director
to discharge directorial duties in any detailed and knowledgeable manner.”
35
Although there may be other mechanisms that already constrain managerial abuse of their discretion, see R
Romano, “Corporate Law and Corporate Governance”, in GR Carroll and DJ Teece (eds), Firms, Markets, and
Hierarchies: the Transaction Cost Economics Perspective (New York, Oxford University Press, 1999), 365, 419;
BR Cheffins, ibid, 607-9, 614-7.
36 See e.g., MA Eisenberg, The Structure of the Corporation - A Legal Analysis (Boston, Little, Brown and
Company, 1976), 156-68; O Williamson, “Corporate Governance” (1984) 93 Yale Law Journal 1197; BR Cheffins,
ibid, 605-6; EF Fama and MC Jensen, “Separation of Ownership and Control” (1983) 26 Journal of Law and
Economics 301, 312-5.
37
S Bhagat and B Black, “The Relationship Between Board Composition and Firm Performance”, in KJ Hopt, et al.
(eds), Comparative Corporate Governance: The State of the Art and Emerging Research (Oxford, Clarendon
Press, 1998), 281-2.
38In many cases, the company is controlled by a family, often the children and/or grandchildren of the founding
shareholder. Over time, this nexus is likely to weaken as it already has in some companies but family dominated
publicly listed companies still fairly common. See also S Claessens, et al, “The separation of ownership and
control in East Asian Corporations” (2000) 58 Journal of Financial Economics 81; R La Porta, et al, “Investor
protection and corporate governance” (2000) 58 Journal of Financial Economics 3, 14-5; La Porta, et al, supra
note 8.
39 The position in many other countries appears similar. Where this is the case, there is a problem of separation
of ownership and control, though not of the type described by Berle and Means. These companies are run not by
professional managers without equity ownership who are not accountable to shareholders but by controlling
shareholders. These controlling shareholders are ideally placed to monitor the management, and in fact are
usually part of the management together with other family members, but at the same time they have the power
to expropriate the minority shareholders as well as the interest in so doing. Cash flow ownership by the
controlling shareholder mitigates this incentive for expropriation, but does not eliminate it, see La Porta, et al,
supra note 8, 511.
40
For example, large institutional investors, effective takeover mechanisms, media and market pressure, and
sufficient viable alternative investment opportunities. It is of course debatable how effective these mechanisms
are in the first place.
41
The Singapore Code of Corporate Governance (available at <http://www.mof.gov.sg/cor/doc/cgcfinalrpt.doc>)
provides in clause 2.1 that independent directors should make up at least one-third of the Board. In England, the
Combined Code of Corporate Governance provides in clauses A.3.1 and A.3.2 that non-executive directors should
comprise not less than one-third of the Board of which a majority should be independent. (available at
<http://www.ecgi.org/codes/country_documents/uk/combined_code.pdf>)
42 Supra note 37, 299-300.
43
R Romano, supra note 35, 375.
44 As opposed to extraordinary times such as during financial distress and takeovers, ibid, 419.
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45
J Lawrence and G Stapledon, Do Independent Directors Add Value?, (Melbourne, Centre for Corporate Law and
Securities Regulation, 1999).
46
Supra note 35, 373.
47 Ibid.
48 Ibid, 384.
49 Cf. Romano, ibid, 385, where the point is made that there is no evidence that investors are losing something in
ordinary governance by having outsiders rather than insiders on board who will prove useful in the event of a
crisis. Rather, it only highlights the need to fashion adequate incentives for outside directors to do their job.
50 IM Millstein and PW MacAvoy, “The Active Board of Directors and Performance of the Large Publicly Traded
Corporation” [1998] Columbia Law Review 1283, 1284, state that after the mid-twentieth century, when the
separation of corporate ownership from managerial control was virtually complete, professional managers began
dominating their Boards of Directors in addition to daily corporate decision making. In practice Board members
were chosen from among its own ranks of large-company executives and from among its professional associates
in law and finance. Board service was largely viewed as an honorific and responsive to management concerns.
Instead of an arms-length relationship, there was a collegial Instead of an arms-length relationship, there was a
collegial relationship between the Board and management. See also Eisenberg, supra note 36, 171-2; JD Cox and
HL Munsinger, “Bias in the Boardroom: Psychological Foundations and Legal Implications of Corporate
Cohesion” (1985) 48 Law and Contemporary Problems 83; GW Dent, “The Revolution in Corporate Governance,
the Monitoring Board, and the Director's Duty of Care” (1981) 61 Boston University Law Review 623, 626-7.
51See ML Mace, “Directors: Myth and Reality - Ten Years Later” (1979) 32 Rutgers Law Review 293, 295-6;
“Enron's Board Gives Black Eye to Efforts Aimed at Improving Corporate Governance” in Knowledge@Wharton,
available at <http://knowledge.wharton.upenn.edu/category.cfm?catid=2>.
52Remarks made by Singapore's Ambassador-at-Large, Professor Tommy Koh, see Lee Su-Shyan, “Ask hard
questions and know your companies well”, Straits Times, 13 July 2002, A18.
53
See also JE Parkinson, Corporate Power and Responsibility: Issues in the Theory of Company Law (Oxford,
Clarendon Press, 1993), 194-5; BR Cheffins, supra note 32, 609-10.
54
Supra note 50, 91-9.
55M Useem, “Business and politics in the United States and United Kingdom” in S Zukin and P DiMaggio (eds),
Structures of capital: The social organization of the economy (Cambridge, Cambridge University Press, 1990),
263, 268-71.
56
See also BR Cheffins, supra note 32, 610-11.
57
SC Vance, “Corporate Governance: Assessing Corporate Performance by Boardroom Attributes” (1978) 6
Journal of Business Research 203, finds that the technical expertise of directors in a company's industry
correlates with firm performance. In highly successful firms, about one-fifth of the directorate dimension consists
of technical expertise. This is a significant finding. If this finding is correct, it should perhaps cause us to be
more realistic about what we can expect of independent directors. At the same time, it may well point towards
the importance of Boards having a higher proportion of directors with relevant industry experience.
59 Ibid, 300.
60 A Klein, “Firm Performance and Board Committee Structure” (1998) 41 Journal of Law and Economics 137.
61 See also Williamson, supra note 36, 1219; Dent, supra note 50, 627-8; Eisenberg, supra note 36, 172.
62 Supra note 34.

63 Affirmed on appeal, see Daniels v. Anderson (1995) 16 ACSR 607.
64 Ibid, at 674.
65 JW Hurst, supra note 9, 25.
66 Automatic Self-Cleansing Filter Syndicate Co v. Cuninghame [1906] 2 Ch 34; Quin & Axtens v. Salmon [1909]
1 Ch 311; [1909] AC 442; Gramophone and Typewriter Ltd v. Stanley [1908] 2 KB 89; Shaw & Sons (Salford) Ltd
v. Shaw [1935] 2 KB 113; Scott v. Scott [1943] 1 All ER 582; Black White and Grey Cabs Ltd v. Fox [1969] NZLR
824; Bamford v. Bamford [1970] Ch 212. The position in the United States is similar, see Continental Securities
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Co v. Belmofffffnt, 99 similar, see Continental Securities Co v. Belmont, 99 N.E. 138 (N.Y. 1912); Associated
Grocers of Alabama, Inc v. Willingham, 77 F. Supp. 990 (N.D. Ala. 1948); Amdur v. Meyer, 224 N.Y.S.2d 440
(App. Div. 1962). In Continental Securities Co v. Belmont, Chase J said at 142: “It is provided by statute in this
state that the affairs of every corporation shall be managed by its board of directors. The directors are not
ordinary agents in the immediate control of the stockholders. The directors hold their office charged with the
duty to act for the corporation according to their best judgment, and in so doing they cannot be controlled in
the reasonable exercise and performance of such duty …. They are trustees clothed with the power of
controlling the property and managing the affairs of a corporation without let or hindrance…. The claim by the
appellants that the body of stockholders has some immediate or direct authority to act for the corporation or to
control the board of directors in the matters set forth in the complaint is based upon an erroneous conception of
the duties and powers of the body of stockholders in this state.”
67 See, e.g. Isle of Wight Railway v. Tahourdin (1883) 25 ChD 320.
68
Supra note 66, 134.
69
See e.g., Companies Act 1948, article 80.
70See also GD Goldberg, “Article 80 of Table A of the Companies Act 1948” (1970) 33 Modern Law Review 177;
MS Blackman, “Article 59 and the Distribution of Powers in a Company” (1975) 92 South African Law Journal 286;
GR Sullivan, “The Relationship Between the Board of Directors and the General Meeting in Limited
Companies” (1977) 93 Law Quarterly Review 569.
71[1993] 2 SLR 370. The relevant provisions in the Singapore Companies Act have since been amended, see s.
157A and Table A, regulation 73.
72 See also Blackman, supra note 70, 290.
73 See e.g., Companies Clauses Consolidation Act 1845, s. 90.
74 Supra note 66, 105-6.

75 Gower's Principles of Modern Company Law, supra note 1, 14-17.
76 Hurst, supra note 9, 26.
77 In the speech by the then President of the Board of Trade, Robert Lowe, to the House of Commons when he
introduced the Companies Bill, 1856, he referred to companies as “little republics”, see Hansard CXL, 138. See
also A Frazer, “The Corporation as a Body Politic” (1983) 57 Telos 5; E Enlow, “The Corporate Conception of the
State and the Origins of Limited Constitutional Government” (2001) 6 Washington University Journal of Law &
Policy 1; Chayes, supra note 9, 39.
78 With the shareholders as the electorate and the Board of Directors as the legislature, see E Latham, “The
Body Politic of the Corporation”, in ES Mason (ed), The Corporation in Modern Society, supra note 9, 224; A
Pound, “The Rise of the Political Model of Corporate Governance and Corporate Control” (1993) 68 New York
University Law Review 1003, 1012-3. It may also be possible to see the shareholders as analogous to the
legislature and the Board as the executive, Gower's Principles of Modern Company Law, supra note 1, 14-17.
The view that a company is analogous to a state may provide a further insight into the preference for strong
centralised decision-making. It is consistent with the view in political theory that once the citizens of a state
have elected a government, they must allow the government substantial autonomy to govern as it sees fit,
without subjecting every decision to a potential referendum. If the citizens are dissatisfied with the government,
they may exercise their votes at the next election to bring another party into office. JA Schumpeter put it this
way in his classic work, Capitalism, Socialism and Democracy (London, George Allen & Unwin Ltd, 4th ed., 1952),
272: “in making it the primary function of the electorate to produce a government (directly or through an
intermediate body) I intended to include in the phrase also the function of evicting it….since electorates normally
do not control their political leaders in any way except by refusing to reelect them or the parliamentary
majorities that support them, it seems well to reduce our ideas about this control”. Later at 286, he states that
“[v]oters do not decide issues…. In all normal cases the initiative lies with the candidate who makes a bid for the
office of member of parliament and such local leadership as that may imply. Voters confine themselves to
accepting this bid in preference to others or refusing to accept it”; cf. S Bottomley, “From Contractualism to
Constitutionalism: A Framework for Corporate Governance”(1997) 19 Sydney Law Review 277, 302-4.
79 If indeed the analogy between companies and the state is a valid one, the decline of the Board as the
legislature in companies is mirrored by developments in parliamentary democracies based on the Westminster
model where the executive has become more powerful at the expense of the legislature, see e.g. Thio Li-ann,
“The Post-Colonial Constitutional Evolution of the Singapore Legislature: A Case Study” [1993] Singapore Journal
of Legal Studies 80, 84-7.
80 Latham, supra, note 78, 230. See also BC Hunt, supra note 9, 135-6. In AWA Ltd v. Daniels, supra note 34,
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878, Rogers CJ opined that “the commercial reality of the matter is that, in these days of conglomerates and
perhaps transnational conglomerates at that, the opportunity for non-executive directors to exercise meaningful
control over management is as slight as the ability of ministers to control a vast bureaucracy.”
81A Hutchinson, “Mice Under a Chair: Democracy, Courts and the Administrative State” (1990) 40 University of
Toronto Law Journal 374, 381.
82 See e.g., Pound, supra note 78; cf. Chayes, supra note 9, 39-41. As is pointed out by DD Prentice, “Some
Aspects of the Corporate Governance Debate” in DD Prentice and PRJ Holland (eds), Contemporary Issues in
Corporate Governance (Oxford, Clarendon Press, 1993), 25, 31, two assumptions underlie proposals for board
restructuring. One of the assumptions is that shareholders play a muted role in the governance of companies. No
doubt shareholders will still have to elect the Board, but in most cases this is a mere formality and there is little
evidence, at least in the UK, of widespread shareholder activism with respect to the election or removal of
directors. Thus non-executive directors will operate in lieu of shareholders voice.

84 See, e.g. “Bank of China - Cleaning Up”, Economist, 9 March 2002, 70-1.
85 Supra note 36, 313-4.
86 Interestingly, Lord Young of Graffham, as outgoing president of the English Institute of Directors, reportedly
shocked an audience in April 2002 by suggesting that non executive directors can do more harm than good and
should be abolished. Lord Young is reported to have said that it was “dangerous nonsense” to assume that part-
time non-executive directors could know enough about what was going on inside their companies to spot
problems. It was wrong to assume that external directors could ever have the information or time to supervise
executive directors and this should be left to investors, see D Roberts, “Non-exec role under scrutiny”, Financial
Times, 25 April 2002 (reproduced in Independent Director at <http://www.independentdirector.co.uk/Non-
exec_underScrutiny.htm>). See also CS Axworthy, “Corporate Directors - Who Needs Them?” (1988) 51 Modern
Law Review 273.
87 Millstein and MacAvoy, supra note 50, 1285-6.
88 Ibid, 1284-8.
89 Ibid, 1294.
90 Ibid, 1298-9.
91 Ibid, 1381.
92
It is also doubtful if market forces provide sufficient pressure on companies to introduce strong safeguards for
good corporate governance, see Parkinson, supra note 53, 185-8; GW Dent, supra note 50, 635-8.
93 See, e.g. “Designed by Committee”, Economist, 15 June 2002, 70 (Special Report on Corporate Governance).
94 The report is available at <http://www.nyse.com/abouthome.html?query=/about/report.html>.
95
The Press Release to this effect is also available at <http://www.nyse.com/abouthome.html?
query=/about/report.html>.
96 The consultation paper is available at <http://www.independentdirector.co.uk/consultation_doc.pdf>.
97 See paragraph 3 of the consultation paper. The Higgs report was issued in January 2003 and is available at
http://www.dti.gov.uk/cld/non_exec_review/pdfs/higgsreport.pdf.
98 Bearing in mind that the various studies mentioned earlier on the whole were unable to arrive at a conclusion
that independent directors added value to their companies. This author must confess some sympathy for the
views of Lord Young, supra note 86. As has been pointed out above, there are significant practical difficulties in
the way of independent directors properly performing their monitoring function. To meaningfully strengthen their
ability to play this role, it is suggested that radical surgery is required that may significantly change the way in
which Boards operate. This may be unpalatable to companies and stock exchanges. The latter is often a
business organization in its own right. Part of its role is to attract companies to be listed on its trading platform.
It therefore has to strike a balance between its regulatory role, and being sensitive to the fact that
entrepreneurs must find it attractive to list their shares on it. Such an inherent conflict may make it difficult to
set the best possible standards even after recognising that rational investors prefer markets with more
safeguards and that this should, in a perfect market, translate into a higher premium for capital issued in such
markets. The latter has to be balanced against managements that are only too ready to allege that new
standards will unduly hinder their ability to manage their companies effectively when in reality, what they are
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against is more accountability.

99 Even though independent directors may find it difficult to second-guess management proposals, independent
directors can realistically play a more significant role in ensuring the integrity of the company's financial
accounts.
100 See also E Latham, supra note 78, 223-5.
101
See Recommendation 2.
102 Other instances arise where the director is, or in the past five years has been, part of an interlocking
directorate in which an executive officer of the listed company serves on the compensation committee of
another company that employs the director. In addition, directors with immediate family members in the
foregoing categories must likewise be subject to the five-year “cooling-off” provisions for purposes of
determining independence.
103 The Act is available at <http://news.findlaw.com/hdocs/docs/gwbush/sarbanesoxley072302.pdf>.
104
Ibid, s. 204.
105 Supra note 41.
106Supra note 41. Clause 912(4) of the Singapore Exchange Listing Manual, which is to take effect for Annual
General Meetings held from 1 January 2003, states that companies listed on the Singapore Exchange should
describe what aspects of the Singapore Code of Corporate Governance they comply with. If they do not comply
with any aspect of the Code, they should disclose such non-compliance and the reasons in their annual report.
107
Clause 2.1.
108
It has been suggested that without a more radical transformation of the position of non-executive directors,
they are likely to be of only limited effectiveness in performing a control function: Parkinson, supra note 53,
performing a control function: Parkinson, supra note 53, 194-5. See also PL Davies, “Institutional Investors in
the United Kingdom”, supra note 48, 69, 92-4. One of the problems with the present proposals outlined earlier is
that they cannot exclude relationships of a social or informal nature.
109 Such as the Singapore Institute of Directors.
110
See also RJ Gilson and R Kraakman, “Reinventing the Outside Director: An Agenda for Institutional
Investors” (1991) 43 Stanford Law Review 863; Parkinson, supra note 53, 195-6; Davies, supra note 104, 93-4.
Gilson and Kraakman suggest that there should be a new class of professional outside directors to monitor
management. These professional directors would be elected by institutional investors who might even collectively
finance a non-profit organization charged with recruiting directors and performing the routine processing and
filing tasks that coordinated action among institutional investors would inevitably generate. One or more of the
industry groups and consulting organizations that now promote the collective interests of institutional investors
might initiate such a clearinghouse. Indeed, the authors say that several groups have already introduced
databases that might be useful in operating a directors' clearinghouse. While this in an attractive proposition,
and indeed the idea of a clearinghouse corresponds somewhat with this author's views, many countries outside
the United States do not have many large institutional investors such as those found in the United States. Even
in the United States, institutional investors have on the whole not seen it fit to adopt this more activist
approach advocated by Gilson and Kraakman.
111It is often said that the pool of potential directors is small. However, it may be that this is the case because
companies are currently prepared only to consider limited categories of persons, e.g. bosses of other firms. They
should perhaps trawl more widely, see “Under the Board talk”, Economist, 15 June 2002, 15.
112 The democratic premise of corporate governance is therefore unaffected.
113
It is very unlikely that a normal shareholder will vote against the nominees. Election to the Board of Directors
is very often a formality once a candidate has been proposed for election or re-election. Occasionally, there may
be a battle for control of the company, or an institutional investor may wish to express its displeasure over the
conduct of one or more directors. These are rare though. Accordingly, if on the proposal made here, a
nomination by the third party is voted against, it is likely to be because management has used its control of the
proxy voting mechanism to veto the candidate, or a substantial shareholder who may be in management has
done so. Provided that these matters have to be disclosed, the glare of public knowledge will act as a suitable
restraint on management. It will also force management, or substantial shareholders who wish to vote against
the persons nominated, to justify their actions. At the same time, the law should be amended to ensure that
those seeking proxy votes have a duty to cast the votes given to them in accordance with the wishes of the
shareholders. the wishes of the shareholders. In Tong Keng Meng v. Inno-Pacific Holdings Ltd [2001] 4 SLR 485,
Judicial Commissioner Woo Bih Li held that a person who had received a proxy form duly signed was not under an
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obligation to cast the votes in the manner specified by the proxy. The recipient of the proxy could choose not to
cast votes. In Tong Keng Meng, the recipient of the proxy was in favour of the resolutions that had been tabled
but the proxy stated that the votes were to be cast against the resolutions. The recipient of the proxy did not
have to cast those votes against the resolutions.
114 Supra note 110, 889.
114ASee “Disclosure Regarding Nominating Committee Functions and Communications between Security Holders
and Boards of Directors”, available at http://www.sec.gov/rules/proposed/34-48301.htm.
115
Other than an industry body representing members of the accounting profession.
116 An editorial in The Economist, “The lessons from Enron”, 9 February 2002, 9, proposed the following: “The
most radical change would be to take responsibility for audits away from private accounting firms altogether and
give it, lock, stock and barrel, to the government. Perhaps such a change may become necessary…. As an
intermediate step, however, a simpler suggestion is to take the job of choosing the auditors away from a
company's bosses. Instead, a government agency— meaning, in America, the Securities and Exchange
Commission (SEC)—would appoint the auditors, even if on the basis of a list recommended by the company,
which would continue to pay the audit fee.”
117 Remarkably, for example, some auditing firms see nothing wrong with conducting internal audits where they
are also the external auditors. KPMG in Singapore has recently announced that it will no longer conduct internal
audits where it is also the external auditor signing off on financial statements, the reason given being the need
to restore public confidence, see The Straits Times, “It may pay well but KPMG will still say no”, 12 July 2002.
118
Section 201(a) of the Sarbanes-Oxley Act of 2000, supra note 103, amends section 10A of the Securities
Exchange Act of 1934 and prohibits a registered public accounting firm that performs for any issuer any audit
from providing to that issuer, contemporaneously with the audit, various non-audit services.
Although accounting firms may be loath to admit it, it is likely that the external audit services they provided
119
were in the nature of ‘loss leaders’ that provided the means to obtain other, more lucrative work.
120 See also P Montagna, “Accounting rationality and financial legitimation”, supra note 55, Chapter 9.
121
Currently, there are exceptional circumstances where auditors can be appointed by a third party, namely the
Secretary of State pursuant to s. 387 of the Companies Act 1985, and the Registrar of Companies under s. 205
(10) of the Singapore Companies Act. In addition, under ss 9 and 10 of the Singapore Companies Act, a company
auditor must be approved by the Minister. This appears to mirror a provision in the English Limited Liability Act of
1855 (since repealed), which provided that at least one of the auditors of a company had to be approved by the
Board of Trade, see Horrwitz, supra note 9, 380. It is submitted that if there is nothing in principle against the
idea of government approved auditors, it is no radical extension to require all auditors of public listed companies
to be appointed by a third party. Auditors play an important watchdog role and it certainly seems right that
companies should not have the freedom to appoint their own watchdogs.
122 See paragraphs 3 and 4 of the report of Singapore's Corporate Governance Committee, available at
<http://www.mof.gov.sg/cor/doc/cgcfinalrpt.doc>. Institutional investors have the potential to play a bigger
role in ensuring good corporate governance as they tend to hold larger blocks of shares in companies. However,
on the whole institutional investors have not taken an active role in corporate governance. There are several
reasons for this. The stake they hold in a particular company may be a relatively small one when measured
against their portfolio of securities. In addition, it takes time and effort to apprise oneself of the affairs of the
company and to take a more activist approach when the institutional investor can exit relatively seamlessly.
123This is separate from the issue of the form that rules relating to independent directors should take. It is easy
enough to stipulate the need for independent directors. As this author has attempted to argue though, ensuring
that the system will allow independent directors to play their monitoring role effectively is a different thing
entirely.
124
See BD Baysinger and HN Butler, “Race for the Bottom v. Climb to the Top” (1985) 10 Journal of Corporate
Law 431, 451-4; Easterbrook and Fischel, supra note 19.
*Associate Professor, Faculty of Law, National University of Singapore. This is a substantially revised version of
a paper delivered at the East China University of Politics and Law in Shanghai on 15 and 16 April 2002. I am
grateful to President He Qinhua for his kind invitation to me to speak at his university and for the very warm
hospitality that he and the faculty at the East China University of Politics and Law showed me during my visit.
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SCC Online Web Edition, © 2023 EBC Publishing Pvt. Ltd.

Page 1 Sunday, November 26, 2023

(2003) 15 SAcLJ 355

Corporate Governance And Independent Directors

CORPORATE GOVERNANCE AND INDEPENDENT DIRECTORS

listed companies, there is usually some dichotomy between ownership and

B An excursion into history

D Directors' fiduciary duties

17 Such duties imposed by the law on directors may be understood as a means to

19 Having independent directors, at least in theory, minimises the danger of

extent, have to be guided by the advice of management. They will be reluctant to

26 It is perhaps hardly surprising that there should be reluctance on the part of

administrative machinery of the company. Accordingly, independent directors cannot

independent directors. Even where Boards with a majority of independent directors

40 The importance of this cannot be overstated. There is a tendency to think that

F Strengthening the role of independent directors

47 It is suggested that if independent directors are still to be considered an important

directors are. It cannot be doubted that management is materially involved in the

treatment preferred by the auditors; and any material written communications

51 In England, the Combined Code105 states that non-executive directors should

independent, certain third parties, whether an industry body,109 or a panel appointed

unsuitable, it is their prerogative to reject them.113 The appropriate

nominating process.114A This enhanced disclosure is intended to provide security

company's board of directors provides a process for security holders to send

57 Under such a proposal, shareholders would no longer be required to go through the

securities markets.123 In the competitive global marketplace for capital, this is

62 Supra note 34.

74 Supra note 66, 105-6.

83 Supra note 35, 384.

against is more accountability.

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