Wednesday, July 22, 2009

The Tale of the Resigning Director

In the aftermath of events that occurred at Satyam and Nagarjuna Finance, there has been a mass exodus of independent non-executive directors from boards of Indian listed companies. More often that not, there is no apparent reason offered for resignation by such directors. As we had discussed in an earlier post, the SGX in Singapore has specified a template for notice of resignation of directors so that the investors and the marketplace have detailed information regarding the reasons for resignation.

Recently, there has been an interesting study of director resignations in Singapore by the Corporate Governance and Financial Reporting Centre at the National University of Singapore. The study looked at resignations of independent directors in Singapore over a nearly two-year period:

In a study of announcements from Oct 1, 2007 to May 31, 2009, we found 163 cases of resignation of independent directors. Eighty-five companies had one resignation, while another 24 companies had two, three companies had three, four companies had four, and one had five resignations. Reasons for these 163 resignations can be categorised into personal-related, corporate governance-related, and others. Personal-related reasons made up 112 out of the 163 cases, or 69 per cent.

The three most common personal-related reasons were 'other commitments' (43 cases), 'personal reasons' (15 cases) and 'personal interests' (11 cases). Examples of other personal-related reasons include age, health and business interests. In a few rare cases, very specific reasons were given.

Using this information, the authors explore some possibilities as to the real reasons for resignation:

Are personal-related reasons usually really personal in the sense of having to do with the personal circumstances of the independent director? One way to assess this is to examine whether the director also resigns as independent director from other boards he sits on.

Similarly, one could also examine whether the retiring director (with personal reasons) is joining other boards at or about the same time. The study then details the quantitative data analysed from resignations in Singapore. The authors, however, also caution against imputing too much into independent director resignations:

Of course, if an independent director resigns from one board and not from others, it does not necessarily reflect negatively on the company or on the director himself. For example, he could be resigning from boards because he wants to be able to commit enough time to his directorships. However, in such cases, we would expect the company to say so rather than use bland reasons like 'other commitments' or 'personal interests'.

The study concludes by noting that while the availability of a mandatory resignation template prescribed by SGX has improved transparency on this count in Singapore, the use of “boilerplate disclosures” continues to be common.

Staying on this topic, a column published in Malaysia pushes matters a few steps further and seeks to involve the regulator through an exit-interview of sorts:

Regulators need to start focusing on [independent non-executive director’s (INEDs’)] resignations. We suggest the following:

● Regulators should engage privately with the INED on the reasons for the resignation; and

● Regulators should be quick to question the company (in writing) why the INED has resigned.

The role of all investors is to find out why the INED has resigned. While a company (or a departing INED) will generally be reluctant to make a public statement, investors should seek and get some explanation in private conversations and then draw their own conclusions/take appropriate actions.

It is not entirely clear whether subjecting a resigning director to such an interview or investigation process in India is at all desirable, but there is certainly a case to introduce some level of transparency in independent director resignation process. This applies not only when directors in fact resign in the midst of their tenure, but even when they retire and opt not to offer themselves for re-election.

1 comment:

Sandeep said...

The issue is rightly flagged by you. But regulator's involvement with each director's resignation / end of tenure is not logistically feasible. 9000 listed companies X 6 (assuming NEDs are half of a Board size of 12) - assuming even a 10% resignation/end of tenure of NEDs that is still a number exceeding 5000.