Corporate Directorship: Inordinate practice of appointing alternates

“How can anyone govern a nation that has two hundred and forty-six different kinds of cheese?” This famous remark by Charles de Gaulle, a former statesman of France widely encapsulates the connection between variety and the accompanying challenges in management or governance.

While the realm of corporate directorship may not be as highly varied as the types of cheese in France, the governance of corporate directorship is highly intricate.

Corporate directorships can be broadly classified into executive and non-executive positions, with the latter being further stratified into independent and non-independent designates. In this mix, there is also another class of designates known as an alternate director, which we will focus on.

An alternate director is essentially an individual appointed by a principal board member or director to fill his or her position temporarily at board meetings when he/she is unable to attend. An alternate director is only accorded with the rights and powers when the principal director is not present. Simply put, an alternate director is a surrogate to the principal director.

Presently, in Malaysia, there are no legal restrictions on the type of board members who can appoint an alternate. In other words, an executive director, independent director, or a non-independent non-executive director may appoint an alternate. The mechanisms for appointment of alternate directors are also largely left to the discretion of individual companies.

Against this backdrop, it is hardly surprising that the appointment of alternate directors has become a matter of rigorous polemics, particularly in light of recent cases where independent directors and executive directors of large companies appoint alternates to act on their behalf for the board and board committee meetings across a substantial period of the year.

Corporate governance advocates widely believe that independent directors have the responsibility to exercise their expertise and informed judgement on corporate affairs independently from the management. Therefore, they should not appoint alternates to stand in for them. To put it starkly, the outsourcing or delegation of independence appears to be counterintuitive. In fact, in some jurisdictions such as India, independent directors of public listed companies are disallowed by way of the Companies Act from appointing an alternate unless the latter is also independent.

Likewise, executive directors are full-time and top-level personnel of the company with the mandate of acting as a conduit between the board and the management in executing the company’s strategic imperatives. They are expected to engage the board during meetings and seek the board’s strategic counsel on proposals and initiatives that the management intends to pursue. As a result, one would not expect alternates to be designated in lieu of the executive directors to discharge such functionalities.

Notwithstanding the aforementioned arguments, there may be exceptional situations where the appointment of an alternate director may be vindicated. For example, a shareholder may have nominated a top-level executive from their institution to act as a nominee director in an investee company while an alternate has been designated as part of an imminent succession. Likewise, a director may be faced with a temporary emergency situation and an alternate may be designated to provide air cover for a short spell.

In addressing this issue, it is important to put structured procedural safeguards in place if the appointment of an alternate director is needed as a stopgap.

Firstly, it is important to formalise the appointment of alternate directors with clear stipulations in the governing documents of the company concerning the duties, obligations, and expectations of the individual’s conduct. Recognising that the alternate director’s position is temporary, any formalised arrangement concerning their appointment should only be for a non-extended or pre-determined duration. Alternate directors should also be excluded from being a named member of any board committee as this may indicate continuity.

Secondly, it is imperative to ensure that alternate directors do not chair the board or board committee meetings when they represent the principal director. Alternate directors may not have the added benefit of connecting information to past or corresponding deliberations and therefore, may not be well placed to mediate discussions as the chair.

Thirdly, there needs to be clarity on the information accessible by the alternate director. As a general rule of thumb, the provision of information to the alternate director should be based on the principle of proportionality, by which the individual should not receive any information beyond what is required for his or her participation.

Fourthly, the practice of tagging or the dual presence of an alternate director alongside the principal director for board membership and board committee meetings should also be disallowed.

Lastly, the need to assess boardroom engagement and effectiveness cannot be understated. As part of the annual board performance assessment exercise, companies should assess if the principal director is able to tangibly contribute to the board in view of the appointment of an alternate. The assessment exercise should be undertaken annually with external experts being deployed as facilitators at least once triennially. Additionally, the key performance indicators approved for executive directors cum board members should explicitly incorporate the element of boardroom engagement for monitoring and evaluation, especially when an alternate director is appointed.

In summary, the practice of appointing alternate directors should only be deployed sparingly and if deemed absolutely necessary. In such instances, the baseline safeguards have to be established. As the trite saying goes, there is no substitute for the time commitment of directors, especially in the changing world of governance, which requires directors to be highly attuned. After all, the vocation of a director shares the same hallmarks as a cheese production process – it requires graft and craft.

Kasturi Nathan and Krishman Varges are Executive Director and Director of Deloitte Malaysia. The above views are their own.