By MAK YUEN TEEN AND CYNTHIA HU

THE announcement template for resignation of directors and key officers, introduced by the Singapore Exchange Ltd (SGX), became effective on Oct 1, 2007. On June 9, 2008, SGX changed the name of the template to 'announcement of cessation'. Chapter 7 of the listing rules on continuing obligations for issuers requires companies to disclose the information set out in the 'announcement of cessation' template, including detailed reason(s) for cessation.

Not 'till death do us part' but no casual flings either

While directors are not expected to serve on boards 'till death do us part' - and independent directors should not serve on boards for too long - they should help the company 'in sickness and in health'. 'Fair weather' directors who resign at the first sign of difficulty for a company are arguably breaching their duties to the company.

Non-executive directors would ordinarily be expected to serve out their terms. While there are situations where it becomes untenable for independent directors to continue - for example, when management persist in withholding vital information from them - they should only resign as a last resort. While resignations of independent directors part-way through their terms may not necessarily indicate that something is amiss, they could be an indicator of corporate governance issues within the company.

Consider the case of Oriental Century. On April 26, 2007, three directors of Oriental Century resigned, including one independent director who was appointed on March 29, 2006. In addition, another independent director who was only appointed on Sept 1, 2006 decided not to stand for election at the annual general meeting (AGM) held on April 26, 2007. About two years later - in March 2009 this year - Oriental Century was rocked by an accounting scandal involving its chairman-cum-CEO, who is also the second-biggest shareholder. While the earlier resignations and the subsequent accounting scandal may not necessarily be connected, the mass resignations do raise questions as to whether the directors already had concerns at that time.

Personal-related reasons dominate

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.

Reading between the lines in resignation announcements

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.

Forty-one of the independent directors who resigned sat on at least one other board. We looked at whether these directors also resigned as independent directors from other boards within the next three months or six months. Eleven independent directors resigned between March 2009 and May 2009 onwards and we cannot be sure whether they will resign from other board(s) within the next three or six months, as our data only covered the period until May of 2009.

Of the remaining 30 independent directors who resigned before March 2009, four resigned from other boards within a three-month period, while five out of the 28 independent directors who resigned before December 2008 resigned from other boards within a six-month period. However, these five directors remained on other boards as independent directors. In fact, one of them still had seven directorships after he had resigned from three boards - two for personal-related reasons - and another had five directorships after he resigned from two boards for personal-related reasons.

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'.

More common now for independent directors to resign noisily

Twenty-three out of the 163 cases, or 14 per cent, cited corporate governance-related reasons. This is virtually unheard of before the introduction of the current regime. These include independent directors resigning because of differences of opinion with the board, chairman, executive directors and/or major shareholders;, and unsatisfactory information flow. Such resignations should at least alert shareholders about possible problems in the company.

Other reasons independent directors resign

The remaining 28 cases (17 per cent) include those which could not be clearly classified as personal-related or corporate governance-related, and include board reorganisation, change of business, and change of major shareholder. Some of these are arguably negative from the corporate governance perspective but they are less clear-cut.

Early retirement of independent directors

There were 63 cases of directors retiring and not seeking re-election. We would not have captured all retirements because, prior to June 9, 2008, the template was named 'resignation' rather than 'cessation'. Not surprisingly, there were only 18 cases before the change from 'resignation' to 'cessation', and 45 cases after.

The chart (on the right) shows the tenure of these retired directors. Thirty-three per cent had served for three years or less. There were eight independent directors who had served for one year or less. In these cases, the companies generally stated 'retirement' or 'did not seek re-election at AGM' as reasons. It would seem that these independent directors were appointed to the board but decided not to go for election at the AGM. While there may be unexpected extenuating circumstances such as poor health, these cases may indicate that the director himself, the board or controlling shareholders had a change of heart.

Greater scrutiny of resignations and early retirements needed

The SGX template for announcing cessation of directors has improved transparency. Nevertheless, boilerplate disclosures citing personal-related reasons are still common.

Shareholders can, however, examine whether independent directors who resign from a board citing personal-related reasons also resign from other boards (or join other boards shortly after resigning). Particular attention should be paid to independent directors resigning citing corporate governance concerns. Finally, where independent directors 'retire' after a very short tenure, for example where they are appointed and do not go for election, the 'courting' may have led the parties to call off the 'engagement'.

Mak Yuen Teen is co-director and Cynthia Hu is research analyst of the Corporate Governance and Financial Reporting Centre at the National University of Singapore. This article is based on a forthcoming report

This article was first published in The Business Times.