An “independent” director3 is one who is independent in conduct, character and judgement, and has no relationship with the company, its related corporations4, its substantial shareholders5 or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director’s independent business judgement in the best interests of the company6.
This Provision, which should be read in conjunction with the relevant Listing Rules, sets out the definitive criteria in determining the independence of a director.
Beyond the definitive nominal criteria, independence is fundamentally a state of mind. As it is almost impossible for anyone to determine the (future) state of mind of a director, this Provision, alongside the Listing Rules, provides proxies for the test of independence.
In effect, the criteria for director independence are as follows:
- An overall principle-based criterion as described in this Provision.
- Specific circumstances that would, or could, result in non-independence:
- Baseline objective tests of independence in the Listing Rules (MR 210(5)(d) and CR 406(3)(d)).
- Other tests of independence, with some non-exhaustive examples set out in Practice Guidance 2.
The Provision describes an ID as someone who is independent in conduct, character and judgement; and who has no relationship with the company, its related corporations, its substantial shareholders or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director's independent business judgement in the best interests of the company.
Note that Section 81 of the Companies Act and Section 2 of the Securities and Futures Act defines a substantial shareholder at 5 per cent shareholding. The inclusion of relationship with a substantial shareholder in the overall definition of independence means that the NC and Board should deem a director who is a substantial shareholder or has an immediate family member who is a substantial shareholder as being non-independent in the first instance.
This principle-based definition emphasises judgement and perception:
- Judgement: The NC and the Board are required to determine whether each director is independent in character and judgement and that he has no relationships, or there are no circumstances, that are likely to affect, or could reasonably appear to affect, his judgement.
- Perception: The Board’s judgement is not just about whether a director is actually independent (a difficult point to prove in most instances), but also whether there could be a reasonable perception of non-independence on the part of the director.
The Listing Rules, MR 210(5)(d) and CR 406(3)(d) set out specific circumstances in which the NC and Board have no discretion but to declare a director as non-independent:
- If the director is employed by the company or any of its related corporations for the current or any of the past three financial years.
- If the director has an immediate family member who is employed, or has been employed, by the company or any of its related corporations for the past three financial years, and whose remuneration is determined by the remuneration committee of the issuer.
- If the director has been a member of the board for an aggregate period of more than nine years (whether before or after listing) and his continued appointment as an ID has not been sought and approved in separate resolutions from (a) all shareholders; and (b) shareholders excluding the directors and CEO and the associates of the directors and CEO. Any such resolutions passed may remain in force until the earlier of the director’s retirement or the conclusion of the third AGM after the passing of the resolution. This is also known as the nine-year rule of director independence.
The above Listing Rules were introduced in August 2018 and will take effect from 1 January 2019, but with a transition period for the third test (nine-year rule) to take full effect from 1 January 2022. In the meantime, NCs and Boards have the discretion to identify a director as independent in the stated circumstances with clear explanations for why and how they assess the director to be so. Prior to 1 January 2022, Guideline 2.4 in the 2012 Code of Corporate Governance will continue to apply.
In addition, Practice Guidance 2 sets out several examples of circumstances in which a director should be deemed to be non-independent:
- A director, or a director whose immediate family member, in the current or immediate past financial year, provided to, or received from, the company or any of its subsidiaries any significant payments or material services (which may include auditing, banking, consulting and legal services), other than compensation for board service. The amount and nature of the service, and whether it is provided on a one-off or recurring basis, are relevant in determining whether the service provided is material. As a guide, payments aggregated over any financial year in excess of S$50,000 should generally be deemed significant.
- A director, or a director whose immediate family member, in the current or immediate past financial year, is or was, (i) a substantial shareholder of, or a partner (with 5 per cent or more stake) in; or (ii) an executive officer of; or (iii) a director of any organisation which provided to or received from the company or any of its subsidiaries any significant payments or material services (which may include auditing, banking, consulting and legal services). The amount and nature of the service, and whether it is provided on a one-off or recurring basis, are relevant in determining whether the service provided is material. As a guide, payments aggregated over any financial year in excess of S$200,000 should generally be deemed significant irrespective of whether they constitute a significant portion of the revenue of the firm or person in question.
- A director who is, or has been, directly associated with a substantial shareholder of the company, in the current or immediate past financial year. This applies when the director is accustomed or under the obligation, whether formal or informal, to act in accordance with the directions, instructions or wishes of the substantial shareholder in relation to the corporate affairs of the company. A director would not be considered “directly associated” with a substantial shareholder by reason only of his or her appointment having been proposed by that substantial shareholder.
The above circumstances are not exhaustive, and the NC and Board should determine, based on the overarching Principle, whether there are any other circumstances or relationships which might impact a director’s independence, or the perception of his or her independence.
Practice Guidance 2 merely indicates circumstances where a director is likely to be non-independent. The NC and Board can still consider a director to be independent notwithstanding the existence of any of those situations. However, if it does so, it must fully disclose the nature of the director’s relationship, and why the Board has determined the director to be independent notwithstanding the relationships or circumstances.
B. Practice Guidance
C. Related Rules and Regulations
- Section 176(1) of the Companies Act: Convening of extraordinary general meeting on requisition [10% shareholder].
- MR 210(5)(c) and CR 406(3)(c): Directors and Management.
- MR 210(5)(d) and CR 406(3)(d): Directors and Management.
- MR 720(1) and CR 720(1): Directors and Management.
- MR 704(8) and CR 704(7): Appointment or Cessation of Service.
- MR Appendix 7.4.1 and CR Appendix 7F: Announcement of Appointment.
- MR and CR: Definitions and Interpretation (see “Immediate Family”).
D. CG Guides
- Board Guide 5.10: The Non-Executive Director [Director Duties].
- NC Guide 3.6: Nomination Process [Nomination and Appointment Process].
- NC Guide 3.8: Appointment and Election of Directors [Nomination and Appointment Process].
- NC Guide Appendix 3B-4: Removal of an Independent Director [Nomination and Appointment Process].
- NC Guide 4.3: Assessment of Independence Status [Director Independence].
- NC Guide 4.4: Criteria for Independence [Director Independence].
- NC Guide Appendix 4B-1: Determining Director Independence [Director Independence].
- NC Guide Appendix 4B-3: Interested Person Transactions Involving Independent Director [Director Independence].
- NC Guide Appendix 4C: Sample Form for Confirmation of Director’s Independence [Director Independence].
E. Related Articles
- “The Nine-year rule” by David Conner. (444KB)
- “The Nine-Year Rule: Is it for independence or renewal?” by Willie Cheng. (145KB)
- “Should CFOs have a seat on the board?” by Irving Low. (140KB)
- “Hardening of nine-year rule for IDs” by Neo Sing Hwee. (131KB)
- “Independent directors: Neither tigers nor pussy cats” by Anabelle Yip. (255KB)
- “Director tenure: Stricter guidelines needed” by Mak Yuen Teen. (654KB)
- “Will the truly independent director please stand up” by Willie Cheng. (441KB)