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Asia-Pacific (APAC) companies should enhance the transparency of their director nomination and removal processes to address independence concerns, according to a recent BlackRock whitepaper.

According to the world’s largest fund manager, board independence is a “major corporate governance issue” in the APAC region that impacts the ability of local companies to “create long-term financial value for shareholders.”

This is, in part, due to the tendency of APAC-listed companies to provide controlling shareholders with a “disproportionate” level of influence and control, BlackRock said, making the presence of an independent director particularly important.

The fund manager identified three challenges in the region “undermining” the ability of directors to fulfil their responsibilities, including a lack of independent chairs and lead independent directors on boards, disproportionate accountability to controlling shareholders, and long-tenured independent directors being reelected, despite no longer being sufficiently independent.

In the 2022 proxy season, independence concerns resulted in BlackRock not supporting directors standing for election at 1,108 APAC-listed companies, the fund manager revealed. This represented one-quarter of the APAC companies where BlackRock voted on director elections and almost three-quarters of the votes cast globally where the fund manager signalled concerns about director independence.

Encouragingly, some companies are enhancing their board independence, with BlackRock revealing that almost half of the companies where the fund manager withheld support in the 2018 to 2021 proxy seasons, due to a lack of director independence, took sufficient steps to enable the fund manager to support directors on independence grounds in the 2022 season.

Going forward, BlackRock has advised APAC companies to ensure they have an “effective” nomination, election, and director removal process, “assess director tenure in the context of performance, and have transparent and independent director nomination and removal processes.”

Companies should also ensure independent directors have “adequate financial expertise to assess the fairness and soundness of related-party transactions, which are prevalent in the region” and ensure that there are “appropriate incentives” for directors, especially at medium-sized and smaller companies.