Independent Directors in Singapore: Puzzling Compliance Requiring Explanation

About the speaker: http://law.nus.edu.sg/about_us/faculty/staff/profileview.asp?UserID=lawdwp

Introduction: https://intranet.law.ox.ac.uk/ckfinder/userfiles/files/Introduction.pdf

Abstract:

At first blush, the rise of independent directors in Singapore provides a straightforward example of an extraordinarily successful legal transplant from the West to Asia. In 2001, Singapore implemented a UK inspired Code of Corporate Governance (Code), which required the adoption of independent directors on a comply or explain basis.  Shortly thereafter, an overwhelming 96 percent of Singapore listed companies reported full compliance. This, combined with Singapore’s world leading economic success, ostensibly confirmed the Anglo-American-cum-global conventional wisdom that independent directors are required for good corporate governance.

This article reveals, however, that Singapore’s supposedly conventional legal transplant was, in fact, unconventional. The original Code defined independence as requiring no independence from controlling shareholders at all—a seemingly illogical aberration from the definition used in most other controlling shareholder jurisdictions. Historical evidence suggests that Singapore’s unconventional approach, however, was the product of strategic regulatory design (not ignorance) and, we argue, was surprisingly effective. It all but guaranteed exceptionally high compliance rates, which sent a critical signal of “good” corporate governance to international markets in the wake of the Asian financial crisis; while, at the same time, allowing Singapore to functionally maintain its efficient (quasi-state and family-owned) controlling shareholder environment.

We suggest that Singapore’s successful use of what we coin “halo signalling” was possible primarily because it possessed unique functional substitutes for limiting private benefits of control, which would otherwise have been the primary function of “properly defined” independent directors. In addition, Singapore’s effective, albeit unconventional, use of “halo signalling” and its somewhat surprising recent move away from this seemingly successful approach will be explored in this article.