Independent Director Education

The Role and Responsibilities of Independent Non-Executive Directors (INEDs)

Course Description

This course provides directors with a comprehensive overview of the critical role and specific duties of Independent Non-Executive Directors (INEDs) on the boards of listed issuers, drawing on guidance and case studies from the Exchange. It covers the fundamental requirements, fiduciary duties, oversight responsibilities, and practical challenges faced by INEDs in real-life scenarios, emphasizing their importance in effective corporate governance.

Target Audience

Existing and aspiring directors of listed issuers, particularly Independent Non-Executive Directors.

Course Outline

Module 1: Introduction to INEDs and Corporate Governance

What is an INED?

  • Definition: Independent members of the Board.
  • Importance: Instrumental to successful corporate governance due to their independence and professional expertise.
  • Mandatory Requirement: Issuers must appoint INEDs representing at least one-third of the Board.
  • Distinction: While not part of the issuer’s management or day-to-day operations, they are collectively responsible for management, operations, and decision making along with the rest of the Board.

Role of INEDs on the Board

  • Providing independent judgment on Board decisions.
  • Contributing to the development of strategy and policies through independent, constructive, and informed comments.
  • Playing a key role in the oversight of risk management and internal controls.
  • Serving on key board committees, including audit, remuneration, nomination, and other governance committees.
  • Taking the lead where potential conflicts of interests arise.
  • Acting as a catalyst for ESG adoption.
  • Scrutinizing the issuer’s performance and monitoring reporting.

Module 2: Legal and Listing Rule Duties

Same Duties as Other Directors: INEDs have the same fiduciary duties and duties of skill, care and diligence as Executive Directors (EDs) and Non-Executive Directors (NEDs) under the law and Listing Rules.

Key Duties (Listing Rule 3.08): All directors, including INEDs, must:

  • Act honestly and in good faith in the interests of the issuer as a whole.
  • Act for a proper purpose.
  • Be answerable to the issuer for the application or misapplication of its assets.
  • Avoid actual and potential conflicts of interest and duty.
  • Disclose fully and fairly their interests in contracts with the issuer.
  • Apply such degree of skill, care and diligence as may reasonably be expected of a person of their knowledge and experience and holding their office within the issuer.

Module 3: INEDs in Practice - Case Studies

This module uses real-life case studies to offer practical guidance on expectations for INEDs. While presented from an INED perspective, the tips are relevant for other directors too.

Case Study 1: Issues flagged in financial reporting

Scenario: Late publication of results, discovery of unauthorized cash transfers and loans by executive management during audit.

What INEDs Should Do:

Investigate reporting delays and internal control deficiencies, meet with auditors, monitor audit progress, address issues timely. Convene meetings to assess legal/Listing Rule implications, arrange investigations into transfers/loans, review internal controls, take steps to recover funds (legal action, reporting to police, suspending duties), ensure implementation of internal control recommendations.

What INEDs Should Not Do:

Ignore past delays, wait for management/auditors to resolve issues, rely solely on executive directors.

Case Study 2: Insufficient information provided

Scenario: Non-executive directors and INEDs only receive information for Board meetings, not regular monthly updates.

What INEDs Should Do:

Press executive directors for monthly updates providing a balanced assessment of performance, position, and prospects. Be proactive, ask for updates, review carefully, raise questions. Make written requests for updates to the Chairman and executive directors and raise the matter at Board meetings.

What INEDs Should Not Do:

Accept the arrangement as time-saving or assume management will flag issues.

Case Study 3: Suspicious transactions / other red flags

Scenario: Monthly accounts show suspicious circular payments and significant increase in receivables.

What INEDs Should Do:

Review accounts in detail, do not solely rely on executive management/CFO. Ask questions about commercial rationale for suspicious payments and reasons for changes in receivables. Ask for more information. Consider Listing Rule implications, take steps for compliance, and insist on professional advice if in doubt.

What INEDs Should Not Do:

Casually review accounts, assume executive directors/CFO have handled issues, believe they are not responsible for reviewing accounts, assume management will raise unusual matters.

Case Study 4: Undisclosed transactions in financial reporting

Scenario: Draft annual report mentions disposals of subsidiaries the INEDs were not previously informed about.

What INEDs Should Do:

Review draft reports in detail before meetings. Ask for more information regarding undisclosed transactions (reasons, rationale, why not informed). Assess Listing Rule implications and steps for re-compliance. Inquire about internal control failings and steps to improve. Read meeting minutes to follow up. Raise issues for discussion at the meeting. Establish reporting mechanisms for remedial measures. Ensure issues raised are recorded in minutes.

What INEDs Should Not Do:

Fail to review reports if absent from a meeting, believe they are not responsible if they didn't approve the report, assume executive directors will inform them.

Case Study 5: Red flags in acquisitions of new businesses

Scenario: Proposed acquisition of an unrelated business with no track record, directors lack experience, valuation based on aggressive assumptions.

What INEDs Should Do:

Carry out appropriate due diligence and make inquiries on the target and relevant parties. Verify documents, assess accuracy/reasonableness of vendor information, and raise questions. Critically assess valuation, assumptions, and seek professional advice on the merits and legal implications (e.g., license extension). Critically assess the business plan and acquisition benefits. Consider the reasonableness of terms, including the financial capability of profit guarantee providers. Consider Listing Rule implications and set up compliance mechanisms. Establish a reporting mechanism for the target's business and review internal controls to incorporate the new business.

What INEDs Should Not Do:

Avoid due diligence to save money, solely rely on vendor materials or valuer's valuation, dismiss concerns due to lack of expertise, proceed based only on projected profitability, sign documents without review, rely on company secretary for all Listing Rule matters, assume staff will handle everything post-approval.

Case Study 6: Unauthorised low-interest loans

Scenario: Auditors discover unauthorized payments described as advances/prepayments which appear to be low-interest loans, lacking documentation and credit assessment, potentially related to an executive director, mostly overdue.

What INEDs Should Do:

Be mindful of the obligation to safeguard issuer's assets and fully investigate transactions, not relying solely on unsatisfactory executive explanations. Understand repayment status and monitoring