The appointment process for independent directors in Malaysian listed companies

Abstract

This study examines the appointment process for independent directors in public listed companies (PLCs) in Malaysia. To this end, open-ended interviews were conducted with chairmen of nomination committees of PLCs in Malaysia in order to understand the appointment process. The results revealed that nominations may come from various sources, including from the firm’s board members, CEO or owners. It was also found that the nominees are those within the personal network of the board members, CEO or owners. The main reason given was to shorten the appointment process and also because they knew the candidates personally. In terms of the selection criteria, the personal qualities of a candidate were found to be very important. In particular, the board puts emphasis on experience, expertise, professional qualifications, and reputation to identify a candidate who can commit to their tasks. However, the board does not consider race, religion, and gender as important selection criteria. Our findings reveal that it is the board that makes the final decision on the appointment or reappointment of independent directors. Based on our findings, we conclude that nominations for independent directorships mainly come from inside the firms and those nominated are within their networks. In other words, the independent directors are known or connected either to the board members, CEO or major shareholders. Hence, it would be very difficult for independent directors to perform a monitoring role as prescribed in agency theory. Rather, the independent directors are appointed to the board primarily to play a service role, consistent with resource dependency theory. The fact that firms prefer professionals with experience indicates that candidates for independent directorships are appointed because of their expertise and their service role.

Women’s entry into the corporate community at the board level

“…This study began with the view that generally directors' appointments to the board are dependent on several factors namely personal qualification, corporate experience, social network and institutional facilitation. However, the appointment of independent directors relies on three critical major factors namely social network (i.e., contacts), corporate management experience and personal qualification (Abdullah et al, 2016).…”

“…Another dimension for women's prospects in gaining board position is to enhance strategic decisions role that reflects the firm's consumer clientele where women are critical but are overlooked resources (Arfken et al, 2004). The fact that firms prefer professionals with experience indicates that candidates for independent directorships are appointed because of their expertise and their service or contributive role (Abdullah et al, 2016).…”

“…Often in considering candidates, several firm-level factors are taken into account: i) review short and long-term strategies to determine the kinds of knowledge and skills that will fulfill the company's goals, and ii) undertake a gap analysis based on the skills of the existing board and determine which skills they need as part of succession plan, i.e., skills lost as a result of retirements. Abdullah et al (2016) studied in Malaysia revealed that the nominees are those within the firm and the personal network of the board members, CEO or owners does matter. There were two reasons attributed to the personal network, firstly, to shorten the appointment process and secondly, they knew the candidates personally.…”

“…Social networks also include beyond firm where ties based on the 'old boy network' influencing the appointment of independent directors (Finkelstein and Hambrick, 1988;O'Neal and Thomas, 1995;Abdullah et al, 2016). There are also appointments that extend individuals' professional and personal networks, by introducing them to senior executives from other industries, some of whom may serve as sounding boards.…”

“…There are also appointments that extend individuals' professional and personal networks, by introducing them to senior executives from other industries, some of whom may serve as sounding boards. Abdullah et al (2016) also raised concern on personal and social networks that impose difficulty for independent directors to perform the monitoring role as prescribed in agency theory. As a result, the skills and abilities that a company requires may not match those possessed by the directors (Mallin, 2004;Abdullah et al, 2016).…”