Independent Directors in Singapore: Puzzling Compliance Requiring Explanation
American Journal of Comparative Law, 2016, Forthcoming
NUS - Centre for Law & Business Working Paper No. 15/03
NUS - Centre for Asian Legal Studies Working Paper No. 15/06
75 Pages Posted: 9 May 2015 Last revised: 5 Feb 2017
Date Written: February 1, 2017
At first blush, the rise of independent directors in Singapore provides a straightforward example of a successful legal transplant from the West to Asia. In 2001, Singapore implemented a UK-inspired Code of Corporate Governance, which required the adoption of American-style independent directors on a “comply or explain” basis. Shortly thereafter, an overwhelming 98% of Singapore-listed companies reported full compliance. This, combined with Singapore’s world-leading economic success, ostensibly confirmed the Anglo-American-cum-global conventional wisdom that American-style independent directors are required for good corporate governance.
Using hand-collected data from 245 codes of corporate governance from 87 jurisdictions, this article reveals, however, that Singapore’s supposedly conventional legal transplant of American-style independent directors was, in fact, highly unconventional. We empirically demonstrate that the widely held belief that the American concept of the independent director has been transplanted around the world is a myth. We argue, however, that Singapore’s highly unconventional and seemingly illogical decision to transplant American-style independent directors into its concentrated controlling-block shareholder environment was the product of strategic regulatory design (not ignorance) and was surprisingly effective. It all but guaranteed exceptionally high compliance rates, which sent a critical signal of “good” corporate governance to international markets in the wake of the Asian Financial Crisis and simultaneously allowed Singapore to functionally maintain its efficient state-owned and family-owned controlling-shareholder environment.
We confirm our findings using quantitative, qualitative, and hand-collected data which provide fresh insights into Singapore’s intriguing institutional architecture and the unique role played by independent directors in Singapore’s successful state-owned enterprises and family-controlled corporations. In addition, we suggest that Singapore’s successful, but highly unconventional use of American-style independent directors provides a number of important insights into some critical areas of comparative corporate law theory. As many countries, including China, have suggested that they intend to adopt the Singapore model of corporate governance, this article also provides practical insights into how the independent director may evolve as a corporate governance mechanism in other critically important economies in Asia and around the world.
Keywords: Independent directors, comparative corporate law, corporate governance codes, comply or explain, signalling, controlling shareholders, private benefits of control, functional substitutes, regulatory design, state owned enterprises, family companies
JEL Classification: K22, G3, G38, M1
Suggested Citation: Suggested Citation