This article first appeared in The Edge Malaysia Weekly on November 24, 2025 - November 30, 2025

INITIAL public offerings (IPOs) on Bursa Malaysia have remained steady this year, with 48 listings so far compared to 55 last year, most of which were on the ACE Market. Since Bursa Malaysia Securities requires at least a third of a company’s board to be independent directors, the number of such directors naturally rises with each new listing.

A potential concern arises, however, when companies rush to appoint independent directors just to meet the listing requirements. Meanwhile, some have noted the rather small pool of candidates.

“This results in the process being more of a compliance sprint rather than a strategic decision,” says Jackie Mah, president and CEO of the Institute of Corporate Directors Malaysia (ICDM).

On the back of the hot IPO market — especially among ACE Market debutants — should more attention be given to the appointment of independent directors?

More often than not, especially among smaller companies, the sourcing of independent directors is through referrals and led by controlling shareholders, observe Kasturi Nathan and Krishman Vargas, Deloitte Malaysia controls assurance partner and controls assurance director respectively.

“This may then lend itself to a situation where companies may miss the opportunity to cast a wider net and source for the best fit. In such situations, the selected independent director may also feel beholden to the controlling shareholder,” they stress in a written reply to The Edge.

This highlights the importance of a nominating committee that functions effectively in its role of selecting, nominating and evaluating candidates for the role, including curating targeted training programmes for directors, they add.

Ernst & Young Consulting Sdn Bhd associate partner Adam Zechariah points out that the quality of independent directors also comes down to factors such as availability and even “sheer luck” on occasions.

“Just like any organisation, the quality of the topmost individuals would vary, and this is by no means an indictment of the quality of directors in our country. The general wisdom is that it is hard to find enough effective directors who meet all the requirements, meaning that smaller-cap or ACE Market companies would have it harder,” he says.

Adam notes that the true quality of a director becomes apparent when the organisation is truly tested.

“Unfortunately, we mainly hear of the negative incidents when people ask ‘Where were the directors?’, particularly the independent non-executive directors (INEDs). You don’t hear much about why a company dodged a bullet because of particularly effective INEDs,” he says.

“It is like good risk management. When things are fine, is it because of good risk management or were you just lucky?”

Corporate Malaysia is certainly not short of examples where INEDs failed in their fiduciary duties and paid the penalty for their failure, including cases involving China Stationery Ltd, Trive Property Group Bhd and Transmile Group Bhd.

There have also been instances in which INEDs defended their company’s best interests. In 2021, for example, the former independent directors of FGV Holdings Bhd advised minority shareholders against accepting a takeover offer from its parent, the Federal Land Development Authority (Felda), deeming the offer unfair and below fair value. Over at Serba Dinamik Holdings Bhd, four independent directors resigned in protest of the board’s decision to initiate legal action against the company’s then external auditor.

The big question is whether the quality of INEDs has improved over the years. Deloitte Malaysia’s controls assurance practitioners say that, anecdotally, it has — driven by greater stakeholder scrutiny, increased awareness among board members and capacity-building initiatives such as the Mandatory Accreditation Programme (MAP) imposed by Bursa Malaysia and conducted by ICDM.

ICDM’s Mah notes a shift in how the quality of independent directors is measured, now defined more by diverse skills and backgrounds than by general experience. She points to the ICDM Directors Registry as evidence, highlighting that it features 37% female representation and 18.6% of candidates under 50, a younger cohort that “often brings essential modern competencies in ESG, digital transformation and technology”.

ICDM maintains a database of pre-screened, board-ready candidates, offering companies a credible and diverse pool of independent directors.

Mah says the next crucial step in improving INED quality is for smaller companies, including those pursuing IPOs, to shift away from friendly appointments to merit-based selections.

She notes that ICDM’s experience with the MAP shows many first-time directors, especially from newly listed or smaller companies, take on the role without fully understanding the scope and weight of their fiduciary duties.

As a result of numerous cases where INEDs failed in their fiduciary duties, there is a widespread perception — both domestically and internationally — that they exist primarily to satisfy regulatory and corporate governance requirements, rather than to make objective decisions for the company.

Adam contends that the problem lies not with the INEDs themselves but with corporate governance as a whole, as standards often slip when no one is actively monitoring or enforcing requirements.

“The same wisdom tells us that doing the right things keeps the company around for much longer, and that includes having an effective challenge mechanism at the board level to avoid groupthink, to help ensure all wider interests are protected — which is the role of the independent director,” he says.

The ability of INEDs to hold sway on contentious decisions hinges on a confluence of factors, according to Deloitte’s Kasturi and Krishman. These include the presence of a critical mass of independent directors, the decision-making process, governance infrastructure and moral courage of the independent directors themselves.

“For example, in boards where the decision-making is by way of consensus or the supermajority, independent directors may hold weight. Likewise, in boards that comprise a majority of independent directors, a concerned independent director would be able to rally for support and make his or her voice count,” they say.

In addition, enabling governance infrastructure — such as appointing a lead senior independent director, holding private sessions for independent directors, and providing access to resources — is also key.

Notably, the Malaysian Code on Corporate Governance recommends that at least half of the board comprises independent directors. For companies with a market capitalisation of at least RM2 billion or that are listed on the FTSE Bursa Malaysia Top 100 Index, the code recommends that the board comprises a majority of independent directors.

EY’s Adam says the effectiveness of INEDs is often limited by uncertainty over whose interests they are meant to protect and how to measure this. “Right now, they are guided primarily by their conscience and the specific rules, various laws and guidelines imposed on them,” he says.

The fiduciary duty of a director is generally to act with care, loyalty, independence of mind and in the best interests of the company at all times.

ICDM’s Mah says that when appointments are treated as a box-ticking compliance exercise or when qualified INEDs are replaced by unqualified appointees known to the major shareholder, it becomes a strategic risk, not just a governance failure.

“INEDs must move beyond the technical definition of independence and demonstrate it through proactive engagement, challenging groupthink and ensuring competency gaps are addressed. Their best defence rests on proving they exercised due care and acted with courageous independence,” she emphasises.

The formal recording of the INEDs’ dissenting views or concerns in the company’s minutes is crucial to demonstrate independent judgement, protect the integrity of the decision-making process and avoid retrospective ambiguity, she adds.

Corporate governance experts do not view more regulation as the solution to improving the quality of INEDs, as existing requirements are sufficient. Instead, the true “acid test” is an INED’s ability to act impartially — something that often depends on who and what determines the board’s composition.

Deloitte Malaysia’s controls assurance practitioners suggest several ways for companies to improve the selection of independent directors. One is to adopt a more objective and independent sourcing process, guided by robust criteria that emphasise the right skill set, value add and the moral courage of the candidates.

ICDM’s Mah says companies can adopt a “board skills matrix”, which maps the board’s current skills against the company’s future strategy. “This ensures that the substance of the INED matches the company’s strategic needs rather than just filling a seat for compliance, ensuring that the appointments are based on capability and relevance, not convenience or relationship,” she points out. She also strongly advocates using independent sources to identify potential independent directors.

EY’s Adam says the ability to make specific expectations clearer can enhance the effectiveness of INEDs. He suggests a company-specific approach, where shareholders collectively set the priorities for independent directors. “The tricky part is coaxing out what the other shareholders want to balance against the rest. It is a difficult task and may require outreach from the company itself, perhaps with the support of the Minority Shareholders Watch Group, and it would not be a one-time exercise,” he adds.

Beyond the company, ICDM believes mandating a professional framework for directors could strengthen existing requirements, similar to how accountants must be registered and maintain their credentials through continuous professional development.

“A certified status would ensure that every individual sitting on a public board has met a universal baseline of competence and ethics. This would create a verified currency of trust that investors can rely on instantly,” says Mah.

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