In the Asia-Pacific (APAC) region, we have identified board independence as a major corporate governance issue that may impact the ability of local companies to create long-term financial value for shareholders, including minority shareholders such as BlackRock’s clients.
BlackRock Investment Stewardship (BIS) encourages companies to have sound corporate governance and business practices that support the long-term financial value creation that our clients depend on to achieve their financial goals. As part of our fiduciary responsibilities as an asset manager to act in our clients’ best interests, we assess a range of risks and opportunities that can affect the financial performance of the companies in which we invest on their behalf. We engage companies to understand their approach to the material drivers of risk and value in their business models, provide feedback, as appropriate, and raise any concerns. We may signal continuing concerns through our voting, where clients have authorized us to vote on their behalf. We vote to advance the long-term financial interests of our clients as shareholders.
BIS’ approach to board independence in APAC
Independent non-executive directors (INEDs) play a key role in ensuring objectivity in the decision-making of a company board and its ability to advise and oversee the management team. This is particularly important given controlling shareholders1 are common in the APAC region. INEDs can provide a balance to the influence of the controlling shareholder(s) and help ensure appropriate management of potential conflicts of interest that may be detrimental to the interests of minority shareholders, such as those inherent in related-party transactions. The appointment of INEDs, however, is often dependent on controlling shareholders, who have a significant say on director nominations and the largest vote in director elections.
In the 2021-2022 proxy year,2 independence concerns resulted in BIS not supporting directors standing for election at 1,108 companies in APAC. This represented a quarter of the APAC companies where BIS voted on director elections3 and almost three quarters of the votes cast globally where we signaled concerns about director independence. Companies in the Association of Southeast Asian Nations (ASEAN),4 Hong Kong, and Japan markets made up the highest proportion of companies where concerns about director independence prompted BIS to vote to signal concerns. A major factor driving decisions not to support the election of directors was concerns about the independence of long-tenured INEDs.
There are certain structural challenges in the region that may undermine the ability of INEDs to fulfill their responsibilities as independent board members:
- Lack of independent board chairs or lead independent directors (Lead INEDs)
- Outsized accountability to controlling shareholders, in part because minority shareholders seldom have the opportunity to engage with INEDs
- Long-tenured INEDs nominated for re-election by nomination committees that are insufficiently independent
Encouragingly, there are signs that some companies are addressing investor concerns about board independence. Almost half of the companies where BIS withheld support in the 2018-2021 proxy year due to a lack of director independence took sufficient steps to enable us to support directors on independence grounds in the 2021-2022 proxy year.5
From our perspective as a long-term, engaged, minority shareholder on behalf of clients, we offer observations on four main opportunities for companies in this region to enhance the independence of their boards:
- INED empowerment is key to their effectiveness in resolving potential conflicts of interest between controlling and minority shareholders. In our observation, more effective boards and INEDs are supported by the appointment of a Lead INED, particularly when there is a controlling shareholder.
- There is an inherent potential conflict when controlling shareholders are able to vote on the election of INEDs, whose role is to counter the influence of such shareholders. An effective director nomination, election, and removal process is therefore important given the prevalence of controlling shareholder structures in the region. In our view, boards that assess director tenure in the context of performance and have transparent and independent INED nomination and removal processes are more likely to act in the long-term financial interests of all shareholders.
- Directors’ expertise and capacity underpin board effectiveness. In addition to ensuring INEDs are qualified and have capacity to meaningfully contribute, companies and investors benefit when there are INEDs on the board who have adequate financial expertise to assess the fairness of related-party transactions, which are prevalent in the region due to the evolution of the various regional economies and the role of the state.
- A well-functioning board requires appropriate incentives for directors, particularly at medium-sized and smaller companies, to remain objective and hold management accountable for acting in the interests of all shareholders.
BIS will continue to engage with companies on behalf of our clients to share our approach to board independence and sound corporate governance with the goal of supporting companies as they seek to deliver durable long-term financial returns. We will monitor the progress made by companies in the region on board composition and effectiveness.
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