APPENDIX A:

Laws on Corporate Board Independence in ASEAN

Cambodia
Prakas on Corporate Governance for Listed Public Companies
Chapter III
Board of Directors
Article 11.

Composition of the Board

The Board of listed Public Entreprise shall not exceed seven (7) members pursuance to
the law one the General Statute of Public Enterprise. The board shall have at least one (1)
independent director and one non-executive director as representative of the private
shareholders. [Emphasis supplied].
Indonesia
Indonesia Stock Exchange
(Formerly called Jakarta Stock Exchange)
Listing Requirements
III.1. The Prospective Listed Company intending to list its shares either at the Main Board or at
the Development Board must fulfill the following requirements:
x

III.1.4. Having Independent Commissioners at least 30% (thirty percent) of the

composition of the Board of Commissioners who can be firstly appointed in
General Meeting of Shareholders held prior to Listing and shall be effective after
the shares of the company are listed.
III.1.5. Having at least 1 (one) unaffiliated Director in the composition of the Board of
Directors who can be firstly appointed in General Meeting of Shareholders held
prior to Listing and shall be effective after the shares of the company are listed.
[Emphasis Supplied]
Malaysia
Bursa Malaysia

Chapter 15 Corporate Governance

PART B DIRECTORS
15.02 Composition of the board of directors
(1) A listed issuer must ensure that at least 2 directors or 1/3 of the board of directors of a
listed issuer, whichever is the higher, are independent directors.
(2) If the number of directors of the listed issuer is not 3 or a multiple of 3, then the number
nearest 1/3 must be used.
Malaysian Code of Corporate Governance
Part 2: BEST PRACTICES IN CORPORATE GOVERNANCE
Constituting an effective board
III.

Board Balance

Non-executive directors should be persons of calibre, credibility and have the necessary
skill and experience to bring an independent judgement to bear on the issues of strategy,
performance and resources, including key appointments and standards of conduct. To be
effective, independent non-executive directors should make up at least one-third of the board
membership.
IV.

Size of non-executive participation

In circumstances where a company has a significant shareholder, in addition to the

requirement that one-third of the board should comprise independent non-executive directors,
the board should include a number of directors which fairly reflects the investment in the
company by shareholders other than the significant shareholder. For this purpose, significant
shareholder is defined as a shareholder with the ability to exercise a majority of votes for the
election of directors.
V.
In circumstances where a shareholder holds less than the majority but is still the largest
shareholder, the board will have to exercise judgement in determining the appropriate number of
directors which will fairly reflect the interest of the remaining shareholders.
Philippines
Securities Regulation Code
Article 7.

Number of Independent Directors

A. All companies are encouraged to have independent directors. However, issuers of registered
securities and public companies are required to have at least two (2) independent directors or at

least 20% of its board size, whichever is lesser. Provided further that said companies may
choose to have more independent directors in their boards than as above required. [Emphasis
Supplied]
Revised Code of Corporate Governance
Article 3.
A)

Board Governance

Composition of the Board

All companies covered by this Code shall have at least two (2) independent directors or
such number of independent directors that constitutes twenty percent (20%) of the members of
the Board, whichever is lesser, but in no case less than two (2). [Emphasis Supplied]
Singapore
Singapore Exchange
Listing Manual, Chapter 2, Part III, 210
(5)

Directors and Management

(c) The issuer's board must have at least two non-executive directors who are independent
and free of any material business or financial connection with the issuer. [Emphasis
Supplied]
Code on Corporate Governance

Board Composition and Guidance

Guidelines:
2.1. There should be a strong and independent element on the Board, with independent
directors making up at least one-third of the Board. [Emphasis Supplied]
Thailand
Securities Exchange Commission Rule
(1) The Companys independent directors shall constitute no less than one thirds of the board
of directors and shall consist of at least three persons; [Emphasis Supplied].

The Principles of Good Governance for Listed Companies

Recommended Best Practices
1.

Board Structure
1.1. The board of directors, with approval from the shareholder meeting, should set an
appropriate number of its members and composition. There should be a number of
independent directors equivalent to at least one-third of the board size, but not less than
3. The remaining directors on the board should be representatives of each group of
shareholders; the number of directors should be proportionate to the ownership of each
group. [Emphasis Supplied]

APPENDIX B:
A Simple Static Model for Corporate Investment Decisions
This is a simple static model by Lu and Wang (2015) which shows how a self-interested
manager makes choices regarding the firms investment on capital and R&D investments and
the implications of their riskiness.
At time 0, the firm decides how to invest on two kinds of assets, physical capital (I) and
research and development (R). At time 1, the output of the firm, which is the earnings from prior
~
investments, is F (I , R) . The firms assets are then dissolved and the gains would then be
~
distributed to all the investors. Assume that F ( I , R ) ( F ( I , R ) , 2 ) , wherein the expected
value of the gross output is increasing and concave with regards to either kind of investment,
and that investments, while causing positive output, are diminishing marginally.
In the model, the randomness of the gross output originates from the investments with
R&D being riskier than that of capital investments. The firm here is assumed to be able to make
its investments without any constraints nor adjustment costs, since all investment frictions are
assumed to be non-existent. A risk-neutral and diversified shareholder, in this case, would want
F I, R
max V
I R,
1 r
to maximize firm value, designated as V. Therefore, at present value,
where r is the discount rate adjusted to risk. In order to maximize firm value, the marginal
product of capital and R&D investment is set at ( 1+r ) at optimal levels of capital ( I 0
and R&D investment ( R0 ).
The firm manager in this model is risk-averse and a utility-maximizer owning a

fraction
of the firm. Consequently, his utility will be derived from the wealth (W) at the
end of the period, which consists of two sources: managerial rent (B) and his equity stake (S).
Assuming that his managerial rent is proportional to the size of the firm in terms of output, then
, where measures the severity of the agency problem in the firm, while his

equity stakes are

In this model, the manager seeks to maximize the expected utility of his end-of-period
wealth ( maxE[U (W )]) . Assuming that the utility function of the manager grows exponentially,
then
his
objective
function
can
be
conceptualized
as
follows:
b

E U W G E W 2 W ,
2

where G is a monotonically increasing function, b 0 is an

absolute risk aversion parameter, and

2 W

is the variance of his end-of-period wealth.

Substituting W S B into the previous equation, and then taking the partial
derivative (the first order conditions) with respect to capital and R&D investments, then:
F
2 F
2
1 r m 1 r n
;
1 r m 1 r n
I
I
R
R
m

1
1

2 1
0 , and n
0
2 1 r

where
.
Therefore,
increasing
investments in either capital or R&D brings greater end-of-period expected wealth and risk.
Because of the agency problem with regards to the manager, two opposite effects exist that
would influence the managers utility-maximizing investment levels at the same time. Hence,
2
2 2 1 1 r
2
F
F

,
2

R
b 1
R .
where it also follows in simpler terms that I
2 F
2F

0,
and
0,
2
R 2
Since I
then this indicates that, given the characteristics of the firm
manager, investments in capital assets are higher than in optimal levels, and investments in
R&D are lower than in optimal levels. Given the conclusion above, there are two propositions
that can be made.
Proposition 1: A non-empty set of exogenous parameter values exist, which results to
utility-maximizing firm managers overinvesting in capital and underinvesting in R&D.
Taking the partial derivative of the marginal products of capital and R&D investments
2
2 2 1 1 r
2
2
2
F
F

2
0, and
0,
I
R
b 1

with respect to , then:

given that
.
Since R&D investments are riskier than capital assets, the two inequalities above
regarding the partial derivatives of the variance would hold for some values of parameter at the
same time. This means that as the agency problems in the firm worsen, this further aggravates
overinvestment in capital assets and underinvestment in R&D. Regulatory powers in the firm
should therefore be responsible enough to prevent the manager from undermining the firms
optimal output through his pursuit of utility maximization. This regulatory power is expected to
be the board of directors who would ensure that investments are made optimally.
Proposition 2: A non-empty set of exogenous parameter values exist, causing a firm with
more regulatory board of directors suffering less from a manager overinvesting in capital assets
and underinvesting in R&D investments, which implies that the firm would relatively invest
more in R&D as compared to capital.

In extreme cases, given R&D assets are riskier than capital assets, it would be possible
that the firm exhibits underinvestment in capital and overinvestment in R&D. For example,
some firms may have a very risk-averse manager or may view capital-intensive projects as
highly risky, which would cause an underinvestment in capital. Also, some firm managers may
opt to invest heavily in R&D given that the managerial rent obtained from R&D would
outweigh the riskiness of the investment, which would cause overinvestment in R&D assets.
However, this scenario is improbable for a normal firm. Therefore, these extremes would not
affect the study.