A Comparison of Boards of Big Firms across Four Countries

by Mak Yuen Teen and Daphne Teo, Apr 24 2009 Boards of directors in Singapore have undergone fundamental changes in their structure, composition and practices, since the Code of Corporate Governance was first introduced in 2001.

In 2008, Watson Wyatt undertook a study of the boards of directors and the director pay practices of the largest 100 companies in each of the following countries - Singapore, Hong Kong, United Kingdom and Australia - using publicly reported information in annual reports. In this article, we summarise the key findings on the structure and composition of boards and also of the frequency of board and board committee meetings. We also offer some observations on these findings.

Board of Directors
On average, Hong Kong boards are the largest and Australian boards are the smallest. Singapore boards have an average of 10 directors, with a minimum of four and a maximum of 18 directors. The average number of directors on Australia, UK and HK boards are nine, 12 and 13 respectively. When boards become too large - for example, beyond 10 to 11 directors - it becomes much more difficult to organise board meetings, and to have effective participation in board decision-making.

However, if boards are too small, there may be a lack of diversity in expertise and viewpoints to effectively guide the company in developing appropriate strategies and overseeing management. Boards with too few directors may also face the issue of imposing too heavy a commitment on the directors, or having the same directors sit on different board committees which may lead to role conflicts. More than 80 per cent of Australian and UK boards have a chairman who is not the CEO or an executive director, while in HK the figure is only about 20 per cent. In Singapore, that is 57 per cent.

However, some would consider the typical UK non-executive chairman to be in essence a 'quasi-executive' chairman, as he generally spends a substantial amount of time on the affairs of the company. This involved role of the UK chairman is reflected in the UK Combined Code, which states that the chairman should meet the independence criteria at the time of his appointment, but thereafter, the test of independence is not appropriate for the chairman. The UK Code also recommends that any individual who is a chairman of an FTSE100 company should not be appointed to the chairmanship of another FTSE100 company, which again indicates the significant responsibilities of the chairmen of large UK companies.

Figure 1 shows the proportion of different types of directors on boards in the different countries. Australian companies, followed by UK companies, have the highest proportions of independent directors, while Hong Kong companies have the lowest proportion. Singapore companies have an average of 55 per cent independent directors. The definition of independence and the guidelines for determining if a director is independent are stricter in HK, UK and Australia than in Singapore in the sense that, in the former countries, they cover situations where directors are connected to substantial shareholders.

Gender diversity on boards is low across all four countries. The percentage of female non-executive directors is 5 per cent in Singapore, 7 per cent in HK, 11 per cent in Australia and 13 per cent in UK. When we look at female independent directors, gender diversity is slightly better for Singapore companies compared to HK, as shown in Figure 2.

Some research findings show that companies with boards consisting of female directors, especially more than one female director, perform better. Greater female presence on boards may also be indicative of boards going beyond 'old boys' networks' and using more open processes for appointing directors.

Boards of directors meet least frequently in Singapore and HK, with average (median) meetings of five times a year. In contrast, Australian boards meet an average of 11 times a year, while UK companies meet an average of eight times a year.

Board Committees
All the companies in the four countries have established audit committees. Although only recommended by codes of corporate governance in all four countries, all the companies in the four countries have also established remuneration committees, except for three companies in Australia. However, in the case of the nominating committee, only 49 of the HK companies have established it, even though it is recommended by the HK code. All 100 UK companies have a nominating committee, while 98 Singapore firms and 95 Australian companies have done so.

Board committees are most active in Australia, with the remuneration committee the most active, meeting an average of nine times a year. This may reflect the more extensive legal requirements on disclosure of director and senior executive pay and the 'say on pay' legislation in Australia. In Singapore and Hong Kong, the audit committee is the most active of the board committees. In all four countries, the nominating committee is the least active.

At a conference in Singapore last year, an experienced UK director mentioned that nominating committees in the UK are not as active as they should be, given the importance of their responsibilities such as assessing skills and experience requirements on the board, recruiting new directors, assessing director independence, and evaluating board and director performance. In Singapore and Hong Kong, nominating committees are even less active.

Future Trends
Globally, boards have undergone significant transformations over the last decade, with more independent directors, fewer executive directors, and more specialist directors being added. In a number of countries, board size has decreased over the last decade.

Singapore and HK boards of large companies are likely to face increasing pressure from global institutional investors to increase the percentage of independent directors to at least half the total number of directors, even if local regulators do not make changes to codes of corporate governance to encourage this. Going forward, there is likely to be a continuing increase in emphasis on board succession planning and renewal, and restrictions on tenure for independent directors. We expect continuing decline in average tenure of non-executive directors.

There will be more pressure from investors and other stakeholders on companies to limit the number of directorships, even though regulators may not impose specific limits. Potential directors who take their responsibilities seriously are aware of the increasing legal and reputation risks they face and therefore are likely to be more selective in accepting directorships and self-impose limits on the number of directorships they hold. The global financial crisis is likely to aggravate this.

Increasing demand for independent directors, coupled with shorter tenures and fewer directorships per director, will create the need for a larger pool of independent directors. In the US, recent surveys suggest that more first-time directors are being appointed to meet the demand. We expect the same to happen in other countries, including Singapore. The need to create a pool of professional directors who go through proper director education will take on more urgency.

With globalisation of businesses, impact of technology, importance of risk management, complexity and dynamism of certain industries, and critical human capital issues such as ageing workforce, succession planning, and talent attraction and retention, we expect boards to continue to diversify the skills and experience of their directors to further incorporate competencies such as international business experience, technology, risk management, industry knowledge, and human resource management.

Directors with multiple competencies such as international business experience and risk management are likely to be highly sought after. High-performance boards are likely to be more strategic in aligning their directors' competencies to the needs of the business, while continuing to ensure that they satisfy rules and guidelines on independent directors.

Boards of large, international companies will be faced with the challenge of competing for director talent on a more global basis. As Asian companies continue to regionalise and globalise, and list in major overseas exchanges, Asian boards will be seeking to add directors with regional and global business experience. They will, however, have to compete with US and European boards not only for director talent in US and Europe, but for director talent in Asia as US and European companies continue to expand their businesses in Asia and seek to add Asian directors.

Companies will also be faced with the challenge of getting the most out of boards with directors who are highly experienced within their respective fields, but who are very different in terms of competencies, backgrounds, nationalities and gender. These directors will increasingly be located in different countries across the globe, and this poses challenges in terms of board and committee meetings, and making important decisions on a timely basis. As one experienced director noted: 'When making important board decisions, there is no substitute for face-to-face discussions and physical board meetings. Doing it through conference calls is not the same thing.'

Remuneration committees of Singapore and HK companies are currently not as active as their counterparts in UK and Australia. This may change as more attention is put on executive pay, especially if disclosure standards on executive pay are raised. Nominating committees may also become more active as more emphasis is placed on issues such as director recruitment processes, board succession planning and renewal, and board and director assessment.

Mak Yuen Teen is regional research director (Asia-Pacific) and Daphne Teo is research associate of Watson Wyatt Worldwide