Worldwide: Directors In Asia: In Need Of Compliance Link

Last Updated: 8 December 2017
Article by Shagun Kumar and Vinod Kumar

Recent developments in Asia have highlighted the growing risks of companies and service providers neglecting proper governance procedures in sourcing external directors for company boards.

As compliance pressures rise across Asia, the position of director is subject to more scrutiny, and comes with greater due diligence demands and responsibilities. A recent case in point is the situation in India, where the government disqualified another 200,000 directors  for holding positions in firms that have failed to meet tax filing obligations several times, not long after announcing the disqualification of thousands of directors at apparent shell companies. Those disqualified will, in theory, be unable to serve as directors of other companies as well, meaning thousands of firms could suddenly find themselves with key board posts vacant.

This is only the most recent step in the Indian government's drive to enhance corporate governance based on the updated Companies Act, which introduces new compliance, disclosure and liability obligations, including the requirement for companies to appoint at least one resident director. While a company's managing director could also act as resident director, an independent resident director is desirable in terms of providing an additional layer of compliance and reporting resources. The government's drive has also been characterised by increased use of technology and data analytics to both identify and 'name and shame' non-compliant directors and firms.

In many respects, this shift is welcome and should foster a more transparent and accountable business environment. But at the same time, it creates an enigma. As resident directors have become more necessary than ever, the scrutiny and potential liabilities associated with directorship have significantly increased, meaning a wider compliance approach must be considered by the companies.

Facing the auditors

Similar patterns are evident in other major Asian markets. In Indonesia, which also requires companies to have a local director, tax authorities have intensified audits of the local subsidiaries of foreign firms. As some tax positions (such as withholding taxes) need to be reported monthly, these investigations can be frequent and may require directors to present themselves before auditors multiple times to answer detailed questions on the preparation of financial statements, or billing practices among a company's various subsidiaries and affiliates. At most companies, the pool of senior people qualified to talk about such matters is very small. And again, as errors or breaches have the potential to heighten financial or reputational risks, engaging directors or service providers with access to the right levels of accounting and legal expertise to ensure accuracy in compliance processes and reporting is critical.

These trends seem unlikely to change in the short-term. In more mature markets, such as Singapore, Malaysia and Australia, the risks and obligations associated with directorship may be more stable, but as the overall focus on compliance rises, it's safe to say directors nearly everywhere will find themselves under the spotlight more often. They are therefore set to play an increasingly prominent role in a company's broader corporate governance approach.

Developing a compliance strategy

When investing or expanding in Asia, it's critical for companies to be aware of and plan for directorship as one part of a comprehensive and proactive response to mounting compliance obligations.

The approach to finding and appointing a local director will vary depending on company, market and type of investment. Firms opening a factory or major operation in Indonesia, for example, would likely be able to secure the necessary tax identification and work permits to 'airlift' in senior executives from their home markets to serve as local directors.

Others looking to start small and scale up, who may lack local networks or on the ground knowledge, are more likely to engage an external provider such as TMF Group to provide a roster of eligible directors. Regardless of the approach, the increasing prominence of the directorship role means these decisions should be considered carefully.

Hiring a director should not be viewed as a box-ticking exercise, but an important step in establishing robust compliance processes, contributing to the vital task of keeping the company in sound legal standing. Following are key points to consider when evaluating a directorship services provider - and directors themselves:

  • Qualifications and commitment: Even if you've enlisted qualified external help, it's important that you examine the CVs of any potential directors in detail, ensuring candidates have the necessary seniority and qualifications to perform their duties effectively. Given the demands of the position a strong legal or accounting background is generally preferred. Candidates should also prove deep knowledge of the local compliance environment and key reporting deadlines, to mitigate the potential reputational risks that are increasingly evident in markets like India and Indonesia.  The process should be viewed as not simply hiring a director, but instituting a compliance function.
  • Training and ongoing support: Regardless of the qualifications a potential director may bring to the table, the unique conditions and rapid pace of change in markets such as Indonesia and India argue for a degree of training and ongoing education, and for directors to be consistently supported by external local expertise – service providers, such as TMF Group, continuously train its staff to provide sufficient support to the client.

    This is why we engage in 'dry runs' with clients in Indonesia that simulate real audits, covering complex areas like risk and transfer pricing documentation, to help our directors understand the processes and questions that are likely to arise before coming face to face with an auditor on the company's behalf. In India TMF Group has established a robust "HealthCheck methodology" to identify and rectify non-compliance, and thereafter keep the directors updated on key regulatory or other changes that may impact companies or their roles.

Learn how to successfully navigate foreign rules and regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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