This article first appeared in The Edge Malaysia Weekly on September 8, 2025 - September 14, 2025
THE role of independent non-executive directors (INEDs) and whether they truly safeguard the interests of all stakeholders, particularly the minority shareholders, is a topic that has cropped up time and time again.
James Hay, founder and director of Singapore-based fund management company Pangolin Investment Management Pte Ltd, recently took to LinkedIn to voice his concerns about how INEDs at some listed companies were not playing their roles effectively, given the influence of controlling shareholders.
He lamented, “On paper, they’re supposed to protect the interests of minority shareholders. In reality, for the most part, they don’t rock the boat, not wanting to risk their annual stipend by upsetting the major shareholders.”
Hay argued that the concept of independent directorships, while sound in theory and effective in ticking regulatory boxes, often falls short in practice, especially in family-controlled companies across Asia. He believes INEDs would be more effective if they held a meaningful personal stake in the companies on whose boards they sit.
“So often, we see major shareholders stuffing minorities while acting in their own interests, but seldom do we see independent directors taking a stance. ‘Keep your heads down, don’t upset the boss, and collect a fat fee for four meetings a year’ is the way to go,” he said in his post.
Hay: For the most part, independent directors don’t rock the boat, not wanting to risk their annual stipend by upsetting the major shareholders
Minority Shareholders Watch Group (MSWG) CEO Dr Ismet Yusoff concurs, noting that independence on paper does not always translate into independence in practice.
“While many INEDs do fulfil their fiduciary duty and act as an effective check, there are still cases where their stance appears muted when minority interests are at stake. Independence is not simply about tenure or shareholding thresholds; it is about the courage to challenge, to probe and to hold management accountable. Where this falls short, minority shareholders feel that their voices are not adequately protected,” he says in an email response to questions from The Edge.
“That said, we have also seen encouraging progress, with more boards recognising the importance of independence as a driver of credibility, investor confidence and long-term value creation.”
‘Independence should not translate into antagonism’
Ismet believes that better regulatory guidance, stricter governance codes and greater investor scrutiny have helped improve how INEDs understand their duties. However, progress remains uneven.
Ismet: The most effective INEDs are those who strike the right balance: they challenge where necessary and collaborate with management to find solutions
“While some directors actively shape discussions and push for higher standards, others remain too passive. Continuous training, board evaluations and renewal remain essential to ensure that every independent director not only understands his/her role but performs it with conviction,” he notes.
Ismet also believes that regulatory sanctions are important for reinforcing accountability. Public reprimands and fines can send a strong message, but their effectiveness depends on how consistently they are enforced and whether the penalties match the seriousness of the misconduct, he says.
For corporate governance to work effectively, Ismet says enforcement must be credible, timely and proportionate.
“It is not about punishing for its own sake, but about reinforcing the principle that directors carry real responsibilities and that lapses carry consequences. Complementing sanctions with measures such as disqualification from future board roles or mandatory remedial training could further strengthen deterrence and, more importantly, promote behavioural change,” he adds.
According to Ismet, what sets apart companies in Malaysia in which INEDs are clearly fulfilling their governance roles is not just compliance with rules like tenure limits or diversity requirements. Rather, it’s how independence is practised day to day, through strong board discussions, transparent succession planning, meaningful board evaluations and directors who are willing to ask tough questions in the interest of all shareholders.
“In such companies, independent directors are not passive participants; they are active stewards who bring balance to decision-making, provide oversight on strategy and risk, and engage meaningfully with stakeholders. These practices demonstrate that independence, when supported by the right board culture and governance structures, can be a powerful driver of accountability and long-term value creation.”
“INEDs play a vital role in providing checks and balances within the boardroom. Their primary duty is to protect the interests of shareholders and ensure that decisions are made with fairness, accountability and long-term value in mind. To do this effectively, they must never be beholden to management; independence must be both a principle and a practice.
“At the same time, independence should not translate into antagonism. The most effective independent directors are those who strike the right balance: they challenge where necessary, but they also collaborate with management to find solutions. The best outcomes emerge when independent directors bring constructive challenge, informed judgment and a willingness to work with management to achieve what is in the best interest of the company and its stakeholders,” says Ismet.
Institute of Corporate Directors Malaysia (ICDM) president and CEO Jackie Mah acknowledges that there are instances where INEDs fail to protect the interests of minority shareholders, but she says it should not be generalised.
“The heart of the issue often lies in the appointment process itself. If INEDs are selected from the personal or professional networks of the controlling shareholders or senior management, their independence can be compromised from the start. This can lead to a situation where directors feel a sense of obligation to their appointers rather than to the broader shareholder base,” she tells The Edge.
“Before looking at the individual directors, it is important to consider the overall composition of the board and who determines it. This is a critical point as it allows a party to determine if the INEDs are truly independent to begin with.”
Mah: True measure of an INED’s quality and effectiveness lies in their professional and personal qualifications
Mah believes that the true measure of an INED’s quality and effectiveness lies in their professional and personal qualifications — in other words, their knowledge and experience, which directly affect their ability to fully understand and dispense their fiduciary duties, especially when acting independently with the interests of various stakeholders in mind.
While regulatory and organisational frameworks are clear, many other factors, beyond qualification, can impact an INED’s effectiveness, she says.
One of the challenges is that INEDs often rely heavily on information provided by management. “If this information is filtered, incomplete or misleading, their ability to provide effective oversight is seriously limited,” she adds.
Another challenge is the culture of groupthink or deference to a dominant chairman or director, which can stifle dissent, making it difficult for INEDs to challenge the status quo. Also, some companies treat the appointment of INEDs as a mere compliance exercise rather than a genuine commitment to good governance, selecting individuals who are unlikely to challenge management, she adds.
Mah also points out that regulators have been working to strengthen the governance framework. For example, the Malaysian Code on Corporate Governance and Bursa Malaysia’s listing requirements have introduced stricter rules, such as a maximum tenure of 12 years for independent directors, to prevent over-familiarity from undermining independence.
“It is for this purpose that ICDM was also established — to professionalise board directors and directorship to ensure the directors and boards are qualified, empowered and accountable. ICDM offers continuous professional development, corporate governance training and networking opportunities,” she says, adding that ICDM also maintains a qualified registry and network of directors and aspiring directors for companies to draw from.
Can part-share remuneration improve board independence?
Pangolin is proposing that INEDs be paid partly in shares instead of receiving their entire remuneration in cash, in a bid to align boardroom incentives with shareholder interests.
Under the proposal, at least 50% of directors’ fees will be used to purchase company shares on the open market each year. These shares will be subject to a lock-up period and cannot be sold while the director remains on the board.
“We don’t want to dilute existing shareholders through new share issuance,” Hay says. This is intended to give directors a genuine ownership stake in the company, encouraging them to act in its best interest rather than “just keeping quiet to secure a decade’s easy income”.
Pangolin plans to table the proposal as a special resolution at Bermaz Auto Bhd’s (KL:BAUTO) upcoming annual general meeting (AGM) on Oct 8. Pangolin has about US$200 million in funds under management, focusing on companies listed in Indonesia, Malaysia, Singapore and the Philippines.
“We have no issues with BAuto’s INEDs, but the company happens to be the first among our investee firms to hold its AGM. So, we’re starting with it,” says Kok Chiew Sia, a senior analyst at Pangolin.
“We’ve submitted a proposal to the company secretary, who will present it to BAuto’s board of directors. The board will then deliberate on whether to include it in the AGM agenda. They may choose to adopt it, or they might reject it on the grounds that it’s not required under current corporate governance guidelines. There’s no guarantee, but at the very least, we’re making the effort to initiate change,” she adds.
Kok believes even modest ownership could help sharpen board oversight. “These independent directors don’t need to hold a large stake, just enough to feel accountable. We believe part-payment in shares will increase engagement and encourage closer scrutiny of management decisions.”
To avoid dilution, Kok says the shares will be purchased on the open market, either by the company or by the directors themselves.
Pangolin estimates that even after nine years of receiving half their fees in shares, directors would hold less than 5% of the company — below the threshold that would disqualify them from being considered independent under Malaysian regulations.
MSWG’s Ismet describes the proposal as innovative and commendable, noting that it encourages directors to share in the risks and rewards of the company, potentially fostering a longer-term outlook in board decisions.
However, he cautions that any form of equity-linked remuneration must be structured carefully to avoid compromising independence.
“Under the Companies Act, directors owe their fiduciary duties to the company as a whole, not to any single group of shareholders. This matters because the interests of the company and shareholders may not always be identical in every circumstance. Directors must always act in the company’s best interests and exercise independent judgement,” he says.
“While part-payment in shares can enhance alignment, remuneration should not compromise objectivity or pressure directors based on short-term share price movements. The key is to balance giving directors ‘skin in the game’ with preserving their independence to focus on the company’s long-term success,” he adds.
Pangolin’s Kok acknowledges that the proposal is not a cure-all.
“If a director is already too close to a major shareholder, this proposal may not change much. But this proposal could serve as a guideline, encouraging directors to feel more connected to the company’s performance through its share price.”
Still, concerns remain about its practicality in the Malaysian context.
An investment banker, speaking on condition of anonymity, says the proposal may face pushback as board fees in Malaysia are already relatively low, making it difficult to attract qualified independent directors.
“The risk-reward balance is off. Directors take on significant legal liabilities, yet fees at many small-cap companies are modest. In this environment, it’s difficult to get top talent. Many boards prefer to appoint familiar faces who won’t push back too much,” he tells The Edge.
“Fees must reflect the responsibilities and liabilities involved. As it is, people hesitate to join boards without strong governance frameworks, as they don’t want constant challenges or potential liabilities,” the investment banker adds.
Idle cash raises questions about capital efficiency
The issue of controlling shareholders exerting undue influence over independent directors is not unique to Malaysia; it’s happening in other Southeast Asian countries as well.
Kok cites Pangolin’s past investment in Thailand’s Premier Marketing PCL, a distributor of snack foods and consumer products that later diversified into organic roasted coffee beans.
“We (Pangolin) used to invest in them but exited after the chairman, who is also the major shareholder, decided to pursue the non-core, loss-making organic coffee business,” she recalls.
“We pointed out that this venture was dragging down the company’s performance and that since it was non-core and unprofitable, they should exit it. But they chose to continue, so we saw no future in the company and decided to leave. The independent directors did nothing.”
Kok also notes the tendency among some companies to retain excess cash rather than deploy it productively.
“Major shareholders often say they want to keep cash reserves in case of a recession or for future mergers and acquisitions (M&A). But from a fund’s perspective, idle cash should be returned to shareholders as dividends,” she explains.
She highlights the case of Panasonic Manufacturing Malaysia Bhd (Panasonic Malaysia) (KL:PANAMY), which reported cash and cash equivalents of RM481.1 million as at end-June 2025, with RM480 million placed with a related entity.
“Panasonic Malaysia is profitable, well managed and cash-rich with net cash accounting for 61% of its equity. However, a significant portion of its cash is placed with Panasonic Financial Centre (Malaysia) Sdn Bhd, which is an internal finance company that functions like a bank, taking deposits and lending to other entities within the Panasonic group.
“In the financial year ended March 31, 2025, Panasonic Malaysia earned an interest rate of 3.78% on these fixed deposits. Still, the company could be putting its cash to better use — either by generating higher returns or by distributing it to shareholders in the form of dividends,” she says.
That said, she acknowledges that there are good INEDs out there, referring to companies like BAuto and Allianz Malaysia Bhd (KL:ALLIANZ).
Strengthening board independence still a work in progress, says ICDM
While board independence among Malaysian public-listed companies (PLCs) has seen measurable progress, the journey is far from complete, says Institute of Corporate Directors Malaysia (ICDM) president and CEO Jackie Mah.
“As at October 2024, 67% of PLCs had boards comprising at least 50% INEDs, which is a positive indicator and reflects a growing awareness of the importance of independent oversight. However, true independence is not just about numbers; it is about purpose and priorities, especially the clarity of the role, what it truly means to dispense their fiduciary duty and the courage to act accordingly,” she says in an email response to questions from The Edge.
While structural and regulatory improvements have been made, Mah notes that understanding and execution of the independent director’s role remain inconsistent.
“For instance, the continued presence of independent directors with tenures exceeding 12 years in 26 PLCs, despite regulatory guidance and investor expectations, raises questions about whether independence is being upheld in substance or merely in form. The low adoption of the nine-year tenure limit with only 18% of PLCs implementing it suggests that some boards may still be reluctant to embrace best practices that reinforce independence and board refreshment.”
Additionally, 261 PLCs have executive chairmen, with 40% of those boards failing to meet the 50% INED threshold. This underscores the vital role of senior independent directors, who act as a counterbalance and lead discussions among INEDs, particularly when the chairman has conflicts of interest.
“When executive influence dominates, the ability of INEDs to provide constructive challenge and independent oversight can be compromised. This is especially true in instances where INEDs have been appointed through known or familiar networks, which pose not only structural challenges, but also challenges in the execution of the role,” Mah explains.
While board independence frameworks have matured, there remains room to deepen and consistently apply the INED role. Mah stresses that INEDs must go beyond regulatory compliance and demonstrate independent thinking and action, representing all shareholders, especially the minority, with integrity and conviction.
Bursa Securities oversees the listing and business rules for Bursa-listed companies, enforcing penalties such as fines and public reprimands. Meanwhile, the Companies Act 1965 and 2016 codify directors’ fiduciary and statutory duties, including acting in the company’s best interests, exercising due care and diligence and avoiding misuse of position or information.
“A director who breaches his or her duties to the company can be held liable for damages and therefore sued by the company or its shareholders, for acting outside their duties or for being in breach of or failure to dispense their duties outlined. The penalties may carry much higher fines to jail time or both, depending on the severity of the offence or breach,” says Mah.
“It is also important to remember that directors are personally liable for breaches of their fiduciary and statutory duties, making them accountable for their actions. Reputational damage is another consideration as this impacts future prospects. Beyond formal penalties, reputational damage is a powerful consideration that impacts future prospects.
“A public reprimand can severely tarnish a director’s professional standing, making it difficult to secure other board positions and undermining personal credibility in the business community. For many, this reputational cost can be far more damaging than the monetary fine itself,” she adds.
ICDM’s registry and efforts to enhance board quality
ICDM’s registry currently lists close to 1,500 pre-screened, board-ready candidates, offering boards a credible and diverse pool of independent directors.
Female representation stands at 37% of the total number of directors on the registry, a positive step towards collective efforts to improve gender diversity in boardrooms.
The registry also reflects age diversity, currently with 18.6% of candidates under 50, 73.4% between the ages of 51 and 69, and 8% in the 70 and above range, ensuring a healthy mix of experience and generational perspectives.
Furthermore, the registry is curated to reflect a wide range of critical competencies, with a strong emphasis on skills in high demand such as environmental, social and governance, digital transformation, technology, finance, human capital and risk management.
Since its inception, the registry has placed over 80 directors, 15% of them being first-time board members, says Mah. “More than just a database, ICDM’s registry is a strategic platform offering rigorous screening and matching services. We provide independent validation to help boards identify truly independent directors who are free of conflicts of interest.”
The recent launch of the Asean Directors Registry further expands access to candidates with regional experience and governance expertise, supporting boards across eight countries, namely Brunei, Cambodia, Indonesia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.
Beyond sourcing, ICDM supports boards with effectiveness evaluations to assess composition, strengths and gaps. These evaluations encourage honest reflection, helping boards fulfil their stewardship roles with integrity and foresight.
This article was first published in THEEDGE on 17 September 2025.
