Phua Pao Yii discusses ways to mitigate the risk of non-executive directors being deprived of directors’ remuneration.
In recent years there have been several instances where the shareholders of a company listed on Bursa Malaysia (“listed issuer”) have refused to approve a resolution authorising the payment of directors’ fees at the listed issuer’s annual general meeting. For example, in late-March 2016, the shareholders of a listed issuer who had incurred losses in excess of RM40 million in its preceding financial year rejected a resolution to pay fees to its directors.
The effect of such a resolution being rejected by the shareholders may not be unduly drastic for an executive director as he would have received his salary and other benefits in his capacity as an employee of the company. However, for a non-executive director, including an independent director, this means that he will not be entitled to receive any fees for performing his duties as a director for the relevant financial year.
The questions that arise are whether such an outcome is fair to a non-executive director of a listed issuer and, if not, what steps can be taken to avoid such an outcome.
A non-executive director is not an employee of a company. In the absence of express provision in a company’s articles of association or a separate contract with the company, he is not entitled to receive remuneration for his services as a director. Furthermore, as directors are fiduciaries of a company, they cannot as a general rule reward themselves from the company’s assets.
In view of the above constraints, most companies include a mechanism in their articles of association to provide for payment of remuneration to their directors. For example, regulation 70 of Table A of the Companies Act 1965 provides, inter alia
, that the remuneration of the directors shall from time to time be determined by the company in general meeting. Hence, the power to approve the payment of remuneration to directors rests with the shareholders of a company in general meeting.
3. CLASSIFICATION OF DIRECTORS
Broadly speaking, a board usually comprises three categories of directors, namely executive directors, independent directors and non-independent non-executive directors.
As mentioned earlier, an executive director is an employee of a company and is usually a senior member of the management team.
According to Paragraph 1.01 of the Main Market Listing Requirements (“MMLR”), an “independent director” is “a director who is independent of management and free from any business and other relationship which could interfere with the ability to act in the best interest of an applicant or a listed issuer
The Corporate Governance Guide (2nd
Edition) published by the Exchange (“CG Guide”) recognises that “independent directors are essential for protecting the interest of minority shareholders
”. To this end, Paragraph 15.02(1) of the MMLR requires every listed issuer to ensure that “at least two directors or 1/3 of the board of directors of a listed issuer (whichever is the higher) are independent directors.
Paragraph 1.01 and Practice Note 13 (“PN13”) of the MMLR set out and clarify several non-exhaustive criteria that have to be satisfied in order for a person to be an independent director of a listed issuer. Amongst these criteria are that an independent director cannot be (i) a major shareholder of the listed issuer; or (ii) an executive director of the listed issuer or its related corporations; or (iii) an officer (other than a non-executive director) of a listed issuer or its related corporations within the preceding two years; or (iv) a family member of an executive director, officer or major shareholder of the listed issuer; or (v) a nominee of a major shareholder (unless he satisfies the conditions set out in Paragraph 3.2 of PN13) or a nominee of an executive director of the listed issuer.
A non-executive director who does not fulfil the criteria to be an independent director is commonly described as a “non-independent non-executive director”.
4. THE TRADITIONAL APPROACH
The most common practice among listed issuers is to seek the approval of their shareholders to pay a specified lump-sum as remuneration to their directors for directorship services provided by them during the preceding
financial year. If this approach is adopted, the manner in which the fees will be divided amongst the directors will be determined in accordance with the articles of association of the listed issuer, or in the absence of express provision, in a manner agreed upon by the directors.
This is an “all-or-nothing
” approach as it does not distinguish between the remuneration payable to executive directors, non-executive directors and independent directors. It is possible that shareholders who are dissatisfied with the performance of a listed issuer or with its management team (including executive directors) may express their dissatisfaction by voting against the resolution. As mentioned earlier, a rejection of the resolution means that all directors will not be remunerated for the past year’s services as directors of the listed issuer.
5. THE EVOLVING PRACTICE
Various practices have been adopted to avoid a situation whereby directors are deprived of remuneration for providing services as directors of a listed issuer.
There have been at least two instances whereby listed issuers have adopted a modified form of the “all-or-nothing
” approach by obtaining the approval of their shareholders for payment of a specified lump-sum to their directors for the current
(instead of the preceding) financial year. If such a resolution is rejected, the directors can decide whether they wish to remain on the board, knowing that they will not be remunerated for their services for the current financial year.
Certain listed issuers have sought approval in advance
from their shareholders to pay specified amounts to their non-executive directors, for example, “that directors” fees of RM80,000 per annum be paid to each non-executive director of the company with effect from the financial year ending on 31 December 2015. A resolution passed on the aforesaid terms will continue in force for each financial year of the listed issuer until it is superseded by a resolution which varies the amount payable or is revoked.
A resolution to approve payment of directors’ remuneration can be refined to cater for alternative scenarios. For example, a resolution can authorise the payment of a different (usually greater) amount to a non-executive chairman. Other resolutions can also be tabled to authorise additional amounts to be paid to non-executive directors who serve on committees of the board, such as the audit committee and nominating committee.
There have been at least three instances where the shareholders of a listed issuer have approved resolutions for payment of directors’ fees to their non-executive directors on the bases described above.
In at least another two instances, similar resolutions were passed by listed issuers only for the current financial year and in one of these, the remuneration was to be paid to the directors on a quarterly basis.
6. PUSHING THE ENVELOPE FURTHER
Sometime in late-April 2016, a listed issuer proposed a resolution to authorise payment of fees not exceeding a specified amount to its directors collectively for each financial year commencing from its current financial year. This proposed resolution is an extension of the “all-or-nothing
” approach highlighted earlier in that the resolution would remain in force until it is varied or revoked.
The proposed resolution was subsequently withdrawn after the listed issuer received feedback from its shareholders. It would have been interesting to see whether the resolution would have been carried had it been put to a vote by the shareholders.
While both independent directors and non-independent non-executive directors would benefit from adopting the resolutions in the forms described in section 5 of this article, it is submitted that the logic for adopting such resolutions for the benefit of independent directors is more compelling than for executive directors and non-independent non-executive directors for two reasons.
First, independent directors derive little benefit from the success of a listed issuer despite the heavy and time-consuming responsibility placed upon them as directors by reason that they have little or no financial interest in, or business dealings with, the listed issuer. Thus directors’ remuneration is the only tangible return which they would receive for providing directorship services. Secondly, independent directors are charged with the additional responsibility of protecting the interests of minority shareholders under the CG Guide.
On the other hand, executive directors receive salaries and other benefits from their employment with the listed issuer while non-independent non-executive directors are usually nominees or family members or close associates of major shareholders or executive directors of a listed issuer and are appointed to the board either by reason of their relationship with, or to represent and safeguard the interest of, a major shareholder. By virtue of these relationships, it is possible that a non-independent non-executive director may derive benefits from their appointors even if they do not receive any remuneration for serving on the board of a listed issuer.
For the reasons set out above, it is submitted that it would be unfair for shareholders of a listed issuer to deprive independent directors from receiving directors’ remuneration for providing their services as independent directors. If resolutions are approved by the shareholders of a listed issuer on terms of those described in section 5 above, any concern which the independent directors may have that they may not be remunerated for their services will be laid to rest.