Varieties of Independent Directors in Asia: A Taxonomy

The rise of the independent director in Asia is an issue of global consequence that has been largely overlooked.  Less than two decades ago, independent directors were oddities in Asia’s boardrooms. Today, they are ubiquitous.

This working paper undertakes a comparative and functional analysis of seven in-depth case studies on independent directors in Asia’s leading economies (i.e., China, Hong Kong, India, Japan, Singapore, South Korea, and Taiwan). These case studies will be published as Chapters, along with an edited version of this working paper, in a forthcoming Book on “Independent Directors in Asia” (Puchniak et al. eds., Cambridge University Press).

A comparative analysis of these case studies reveals a reality which is the opposite of what conventional wisdom suggests: many of Asia’s leading economies have surpassed those in the West in terms of the proportion of ‘independent directors’ on their corporate boards.  In a similar vein, many of the laws and regulations in Asia’s leading economies appear to do more to promote or require ‘independent directors’ on the boards of listed companies than those in many leading Western economies. The reality that most leading listed companies in Asia now have a significant number (or, in fact, in many cases a majority) of ‘independent directors’ on their board is a striking development that has been almost entirely overlooked.

As this working paper reveals, however, the meteoric rise of the ‘independent director’ in Asia is considerably more complex than it initially appears. Although the label ‘independent director’ has been transplanted precipitously from the US (in some cases via the UK) throughout Asia, who is labelled an ‘independent director’ (i.e., the ‘form’ that independent directors take) and what independent directors do (i.e., the ‘function’ they perform) in Asia differ significantly from the American concept of the independent director.  To add to the complexity, the form and function of ‘independent directors’ varies within Asia from jurisdiction to jurisdiction.  As such, in reality, there are ‘varieties of independent directors in Asia’—none of which conform to the American concept of the independent director. This challenges the widely-held assumption that ‘independent directors’ are universally similar and follow the American concept of the independent director.  It also complicates inter-jurisdictional comparisons of ‘independent directors’ within Asia, which is a core objective of this working paper and the Book.      

This working paper attempts to overcome this significant hurdle for comparative analysis by offering an explanation for why distinct varieties of independent directors have emerged throughout Asia. At first blush, this question is perplexing. All of Asia’s leading economies claim to have either explicitly adopted or been heavily influenced by the American and/or ‘Anglo-American’ independent director model.  With a common model, one would expect to find a high degree of uniformity among independent directors in Asia—not diverse varieties. However, a comparative analysis of Asia’s leading economies reveals six principal factors that have driven independent directors in Asia to evolve in a variety of unique jurisdiction-specific ways: (1) shareholder ownership structures; (2) legal origins; (3) types of shareholders; (4) functional substitutes; (5) political economy; and (6) cultural norms. Understanding how these factors have driven distinct varieties of independent directors to emerge and evolve in Asia’s leading economies allows us to construct a loose taxonomy of the varieties of independent directors in Asia. This taxonomy provides a useful tool for identifying which inter-jurisdictional comparisons are likely to yield significant insights, and which are likely to mislead.

This working paper concludes by highlighting how an understanding of the varieties of independent directors in Asia can advance corporate governance practice and contribute to comparative corporate governance theory. The conclusion illuminates the importance of jurisdiction-specific knowledge for accurately understanding the rise and functions of independent directors in Asia.

Dan W. Puchniak is the Director of the National University of Singapore (NUS) Centre for Asian Legal Studies (CALS) and an Associate Professor at NUS Law.

Kon Sik Kim is a Professor of Law at Seoul National University.