Medición de los constructos

Apart from the aforesaid disclosure best practices, integrity is always the main concern when it comes to corporate failure or collapse. The disclosure best practices hinge on the integrity of a director sitting in the board of a corporation. Even if there is implementation of disclosure best practices in the governance system of a corporation, it remains a failure if a director does not hold on to the highest level of truthfulness and uprightness. However, it is difficult to instil integrity in every single director since a board is usually composed of different mix of individuals from diverse backgrounds and characters. Hence, it will be wise to begin the discussion on integrity of independent directors who are supposed to be independent from a board. It is instructive to examine how an independent director can play their role and exercise independence with higher integrity and trust.

158 First of all, an independent director must possess the necessary skill, knowledge and experience to independently assess board’s decision based on the intrinsic value of the subject matter discussed in a board meeting. In Beam v. Stewart (2004), the United State’s Delaware Supreme Court reaffirmed that “the primary basis upon which a director’s independence must be measured is whether the director’s decision is based on the corporate merits of the subject before the board, rather than extraneous considerations or influences”. Basically, there are two limbs which can be deduced from that case. The first limb requires directors to evaluate the corporate merits of the subject before a board. To do so, an independent director will need to have sufficient knowledge of the subject matter discussed in the boardroom. Thus, personal qualification and skill of a director will be called into question since he should exercise his independent judgment in making his own assessment and decision. It will be hard to imagine that minority shareholders will be properly protected by an independent director who is lack of experience and knowledge to detect any irregularity in a board.

With regard to the background and knowledge of an independent director, Barker (2009) augured well that higher quantity of independent directors in the boards of the United Kingdom and European banks proved to be inadequate in preventing financial crisis from happening in 2007/2008. It was explained that “unless allied with specialist knowledge and training - the technical independence of directors does not necessarily translate into the critical and independent thinking that uncovers fault lines in complex business strategies”. Of course, it will be idealistic to have independent directors who are experts or specialist in their own field. However, when we touch on the issue of integrity, it does not necessarily mean that an independent director ought to have the highest qualification or specialisation to be appointed to the board. The technical duties

159 of examining the records or statements are best left to the internal and external auditors of a corporation.

Rather, it makes more practical sense when Barker (2009) argued that “the convening of a distinguished panel of men and women will be ineffectual if those directors do not also possess the expertise to understand the fundamentals of the company’s business and the attendant risks”. Due to the complicated intricacies in the modern business reality, independent directors must have the minimum qualification or working experience on business administration or financial matters or at least possess some basic knowledge on the business activity of a corporation that they are hired. This is simply because the reason of having one-third of independent directors in a board is to ensure that they can apply their independent mind without being largely influenced or dominantly controlled by other non-independent directors. Having the basic understanding of the policies and business of a corporation, an independent director is able to uncover any potential conflict of interests or risks that may give way to corporate malfeasance. This in turn contributes to greater integrity and independence of which an independent director is the guardian of minority shareholders interest.

In furtherance to the need of appropriate background and basic knowledge, an independent director should not be contended with his or her existing qualification and skill possessed. There shall be a constant quest for more relevant information regarding the business activities and financial affairs of a corporation even if they are merely independent non-executive directors of the corporation. With the required information and knowledge, an independent director will be better equipped with the skill of examining and accessing the veracity of information disclosed to the board by the

160 management team. On this note, Flannigan (2009) rightly re-evaluated how an independent director should act nowadays:

Independent directors are frequently identified as instruments of investment protection for passive capital. They ostensibly enhance the quality of corporate decisions and constrain opportunism. In many instances, however, independent directors serve active capital openly or tacitly, or they provide a supportive veneer of legitimacy while offering ineffectual oversight. Independence is often a façade or an illusion. It is compromised by levered or career-advancing deference, community of ideology, social fraternity, fear of marginalisation, managed information access and a variety of other significant behavioural incentives and limitations. These factors impel independent directors to ‘see’ the logic or utility of the proposals of controlling coalitions. They become tools, rather than filters, of the agendas of active capital.

Based on the above re-evaluation by Flannigan, it is definitely not an overstatement to say that independent directors are the guardian of capital for minority shareholders who are generally inactive in their investment approach. On the other hand, it is also not an understatement to agree that they often serve the interest of majority shareholders who control a corporation due to several internal and extraneous factors such as the enticement of monetary rewards, retaining of their board position and denial of access to certain information. This is the very reason why independent directors should break free from the chain used by controlling shareholders in order to find out the wrongdoings of other directors in a board. They should not accept whatever information fed by the board or management during meetings. But they should carefully sieve through the

161 information and critically scrutinise them in the presence of the board. If it is successfully done, then independence shall no longer be a facade but a reality.

Essentially, the integrity of director’s independence centres on the axis of business judgment rule. In Aronson v. Lewis (1984)25, the United State’s Delaware Supreme Court ruled that “the requirement of director independence inheres in the conception and rationale of the business judgment rule”. It means that an independent director shall adhere to the standard of business judgment rule as required by the corporate law. The Corprimacy inheres that the business judgment rule should be exercised in the best interest of a corporation which includes the entire stakeholders. They are expected to introduce elements of objectivity and impartiality into board decisions due to their independent stand. Sadly, this is not the case in the real corporate life where independent directors are appointed in public-listed corporation for two plain reasons – to fulfil the one-third requirement under the Bursa Listing Requirements and to take advantage of their connection and social status for the purpose of securing projects and other marketing related duties.

Transmile scandal is a case on point. The unfortunate event happened in Transmile case would have somewhat been avoided had the independent directors exercised their business judgment rule in detecting the misleading financial statement. It certainly did not make commercial or financial sense that Transmile was making huge profits at an increasing rate when the corporation had just bought few airplanes which had not been geared into operation yet. Hence, the cash outflow of the corporation in the purchase costs of the airplanes should have been taken into consideration by the independent directors before approving the financial statements. On 28 October 2011, the Sessions

162 Court has delivered the first landmark decision where the two independent directors who sit in the audit committee of Transmile were sentenced to 1 year imprisonment for knowingly authorising the submission of misleading financial statement to Bursa Malaysia under Section 122B(b)(bb) of the Securities Industry Act 1983. The Star News (12 November, 2011) reported that:

… the judge emphasised that the audit committee has specific duties, functions and responsibilities and that the investing public rely on them very much. He said that in this case the evidence showed a blatant disregard of the seriousness of the concerns on the contra transactions when the committee was told by Deloitte (Transmile's auditors then) that the contra transactions were very unusual and lacked commercial justification. These, he said, were sufficient warning bells and as audit committee members, they should have raised these issues to the board but instead failed to do so.

The above decision sent a clear message across boardroom that good corporate governance requires cautious exercise of business judgment rule on the part of independent directors as their integrity will stand to protect minority shareholders as a whole. They should not act as “ornamental pieces” whose duties are restricted to attending board meetings regularly in order to rubber-stamp financial reports and other documents. As mentioned earlier, independent directors are expected to scrutinise corporate decisions and matters.

Generally, an independent director should not be under the dominance and control of any entity or individual directly or indirectly. That is the gist of director’s independence in accordance with Paragraph 1.01 of the Bursa Listing Requirements where an

163 independent director must not be an executive director or officer of the listed corporation. Further, the Listing Requirements prohibit major shareholders or nominees acting for the executive director or major shareholders from being appointed as the independent directors of the listed corporation. The underlying rationale of this rule is to minimise the dominance and control of executive directors and majority shareholders. In this context, minority shareholders will hardly be protected if the hands of an independent director are tied by the dominance and control of non-independent directors who are often the controlling or majority shareholders of a corporation. If an independent director is not truly independent in the practice, then it makes things easier for majority shareholders to expropriate wealth from minority shareholders by engaging in manipulative scheme or act that speculates the value of a corporation’s share price.

An independent director is hardly independent when practically he or she is appointed by the board that comprises of controlling shareholders and management team. Bhagat and Black (1999) criticized the credibility of independent directors as “lapdogs rather than “watchdogs” over the affairs of corporations. Most often than not, an independent director will not be bold enough to challenge or question the decision of other directors who jointly appointed him onto the board. This is akin to a “lapdog” as what Bhagat and Black (1999) lamented on the integrity of an independent director. As such, it will be extremely odd to see that they will not rubber stamp the board decision when asked to do so by other non-independent executive directors who are also their appointers. In this regard, it is right to say that pure independence will only happen when fear or favour is totally eliminated or greatly reduced. At that point, they are no longer afraid of being removed from the board by controlling shareholders.

164 Nevertheless, mere presence of dominance and control upon an independent director does not always mean that the independent director is not independent in the absence of conflicting interests and personal benefits arising from a particular decision or transaction. It is worthy to note that the “relevant inquiry is not how the director got his position, but rather how he comports himself in that position” as viewed by the United States Delaware Court of Chancery in Andreae v. Andreae (1992)26. The real test of how an individual comports himself as an independent director in a board stands on the strong footing of integrity. The case of Andreae v. Andreae (1992) postulates the need to understand the importance of distinguishing one’s position as an independent director with one’s self awareness of duties and responsibilities towards the corporation as a whole.

For instance, in a recent takeover bid reported in the Star News (January 12, 2011), the independent directors of PLUS Expressways Bhd (PLUS) had taken a constructive approach of requiring bidders to pay an upfront deposit of RM50 million with the offeree company and to provide proof of funding “as a means to determine their seriousness and credibility” within a given deadline. On 12 January 2011, one of the bidders, Jelas Ulung Sdn Bhd failed to deposit the said amount of money to PLUS. In a way, this brilliant action has greatly eliminated uncertainties surrounding the takeover bid over the assets and liabilities of PLUS. The reduction of uncertainties will also help to ward off any unwanted share price speculation of PLUS. The aforesaid action taken by the independent directors is laudable in view of the proactiveness shown on their part. The independent directors had indeed exercised their business judgment rule in a way that uphold their integrity of independence without fear or favour to any internal or external party.

165 Notwithstanding that an independent director may be truly independent from a board, it makes little difference to the level of protection of minority shareholders if there is no integrity on the part of the independent director. For example, even if the independent directors may have discovered the hanky-panky of the financial status of a corporation but they choose to be quiet instead and indirectly condone the action or decision of the other non-independent directors. For this reason alone, no level of independence could save a corporation if their integrity is overshadowed by greed and position. At the end of the day, it is the professionalism that an independent director should portray in upholding their integrity in managing a corporation. Independent directors must be able to garner the respect from their colleagues sitting in the same board so that their words are being heard and well accepted. They should not feel intimidated to question the board and voice out their concern. To be able to do so, it entails business acumen along with sufficient information in their hands. After all, their integrity lies on the legitimate expectation that they champion the interests of a corporation, in particular minority shareholders who are vulnerable to oppression by majority shareholders. Besides independence within the board itself, it is also important to gauge the appropriate level of board independence from the management in the context of Corprimacy.