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(CHOIVO CAPITAL) Why Board of Directors are typically toothless, and reforming it.

Choivo Capital
Publish date: Fri, 29 Mar 2019, 11:38 AM

For a copy with better formatting, go here, its alot easier on the eyes.

Why Board of Directors are typically toothless, and reforming it.



One of the common factors that face shareholders globally right now, is the incompetence, irrelevance (of the directors, not the structure) and in some cases, the maliciousness of the board of directors.

Depending on the maturity of the markets and the shareholding structure of the companies, the incompetence can hold different forms. They are mainly two.


Matured Markets – Diverse shareholdings without a major/controlling shareholder

In markets like the US, where the companies are so huge and the shareholdings so diverse, where often, companies do not have a major or controlling shareholder, the ownership of the company is often “Hijacked” by the CEO.

This “Hijacking” often stems from shareholders not taking a owner’s view towards their own holdings and casting their votes or making their voice known.

It also stems from institutional funds often only voting in accordance with the board’s wishes, although this appears to be shifting recently, with index fund providers starting push their weight around.

Without a strong shareholder, a CEO can hijack the board by recommending Directors that are likely to be pliant to his wishes.

Now you might wonder, why on earth would the current set of Directors agree to this?

It’s simple, most directors do not have skin in game beyond the shares given (not bought personally) by the Company.

In addition, for most of them, the fees from being a board of director consist of the majority their income. They are often paid 200-300k just to show up for 4-8 meetings a year.

Independent my ass.

The goal of most board of directors, is to be pliant without seeming obsequious while appearing smart, to keep their current seat and be recommended to sit other boards.

Basically, the goal is to be a friendly German Shepherd. Looks like he’s capable of guarding the house, but only needs a small cube of meat to be your friend.

And to top it off, unless you have 50.1% shares or more, you can’t force your way into the board of directors, but rely on the goodwill of the current board of directors to vote you in.

You can own 30% of the shares, and still not be given a board seat. Just ask Koon Yew Yin.


Immature Markets – One major/controlling shareholder

These markets, which include Malaysia, Singapore, Korea or Hong Kong for example. Where many companies are family businesses.

Sometimes, the major shareholder may have more than 51% in which case they do deserve to have control, other than in matters which require a special resolution and thus 75% agreement. If the controlling shareholder have empire building tendencies and pay themselves obscene salaries, there is not much you can do (I do have a suggestion which i will elaborate below).

However, often these shareholders do not actually have 51%, they just happened to be the founding families and through circuitous shareholding structures, as well as the hiring of pliant German shepherds as shareholders, they now hold control.

It is incredibly hard to vote them out, although recently the Chairman of Korean Air was voted out. Due to the sheer number of scandals. It really should not be this hard to vote out incompetent boards.


Suggestion for Reform

The one thing I believe in, is in the Iron Law of Incentives. You get what you incentivize for. Incentivize for pliant and friendly German shepherds, and that’s what you get.

Members of the board of Directors should consist of people who have their skin in the game (and deeply so), and do not actually need the fees in terms of income.

My suggestion is as follows:

  1. Director fee’s (including remuneration) should only consist of the cost of them coming to the meetings, and is capped at RM30,000.
  2. Any person with more than 5% shares and/or in the top 5 is guaranteed one seat.
  3. When giving out seats, connected persons as defined by the Companies Act 2016 are considered as one.
  4. Only after the above is done, can additional independent directors (maximum of 2) be elected.


Connected persons in the Companies Act 2016 is currently defined as:

  1. a member of that director’s family; or
  2. a body corporate which is associated with that director;
  3. a trustee of a trust (other than a trustee for an employee share scheme or pension scheme) under which that director or a member of his family is a beneficiary; or
  4. a partner of that director or a partner of a person connected with that director.
  5. “a member of that directors’s family” shall include his spouse, parent, child (including adopted child and stepchild), brother, sister and the spouse of his child, brother or sister.



Personally, while I may not be a fan of Koon Yew Yin and what he does, I do think he should have been given a board seat in JAKS.

At one point he was the largest shareholder with the highest skin in game, however, he could do nothing against the board of directors. With many of the directors not even having 100,000 shares, but allowed to approve private placements to front-run him (the way he handled it was also less than sharp to be fair).

This reform if done, is unlikely benefit me directly as I am very far away form 5% or top 5 shareholder in any listed company, much less my current holdings. Maybe in 10 years.

But I’m sure if this reform is taken up in one way or another, every shareholder should stand to benefit.

In the meantime, let’s all have more of an owners mindset, and actually show up to the AGM to voice any suggestions and vote.


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3 people like this. Showing 2 of 2 comments


Great article. Similar views on HKEX have always been voiced by this author which I find similarly interesting to read:

2019-03-29 12:13

Choivo Capital

Ah david Webb, I've not read him before, but a friend recommends him to me, since i'm currently studying the HK market.

2019-03-29 12:17

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