GOVERNANCE: GAME CHANGER – Seeking real changes in compliance

Published July 19, 2013

First published in Business Times, July 11, 2013

With the new Code of Corporate Governance in effect for the better part of a year, have companies been adhering to the standards and best practices that are recommended? MICHELLE QUAH finds out


Prof Mak: ‘I think we will continue to see considerable variation in attitudes and mindset about the Code. There continue to be companies that ignore the spirit of the Code and either do not explain deviations or do this in a boilerplate fashion.’ – BT PHOTO: ARTHUR LEE


SINGAPORE’S new Code of Corporate Governance – with its tighter definitions of director independence, higher standards of pay disclosure and greater focus on risk management – has been in effect for the better part of a year, beginning with annual reports covering financial years starting on or after Nov 1, 2012.

And, with the process of reworking the Code having been in place for two years prior to proposed revisions being accepted by the Monetary Authority of Singapore in May last year, the changes were also well-anticipated by companies here.

It is, therefore, timely to examine if changes have been wrought to the corporate governance regime by what is essentially still a voluntary guide to best practices.

Already, a study published earlier this year by consultants Freshwater Advisers has found that many companies are still falling short of acceptable disclosure standards on remuneration.

“The standards of disclosure have worsened since 2011 with 28 per cent, up from 2010’s 21 per cent of companies not following the Code of Corporate Governance guidance and several appearing to be in breach of the listing rules; neither following the code nor explaining why not,” it said.

Associate Professor Mak Yuen Teen from the NUS Business School, where he teaches governance and ethics, says: “The Singapore Exchange (SGX) has been querying companies about their failure to comply or explain with the Code’s recommendation to disclose the remuneration of their top five key executives in bands of $250,000. Some companies are disclosing the pay of only one or two executives and arguing they don’t have five key executives outside of the board and CEO. Others are continuing to cite ‘competitive reasons’ or ‘fear of poaching’ for not disclosing remuneration of directors and key executives. This is often ludicrous, especially where the management are major shareholders themselves.

“I think the areas where we will see real changes are those where SGX has taken it upon itself to introduce listing rules changes in the same areas – for example, in internal control/risk management through rule 1207 (10), and in the disclosure of remuneration through rule 1207 (15) – or where it has queried companies for inadequate disclosures.

“I think we will continue to see considerable variation in attitudes and mindset about the Code. There continue to be companies that ignore the spirit of the Code and either do not explain deviations or do this in a boilerplate fashion,” Prof Mak adds.

Jamie Allen, secretary-general of the Asian Corporate Governance Association (ACGA), which publishes a much-referenced corporate governance ranking of Asian countries called CG Watch, believes little has changed thus far.

“It’s the usual story in Singapore and Hong Kong – only the top companies, the blue chips, make the needed changes and improve their corporate governance practices, and this is a limited number.

“We don’t find a real change from the situation Singapore was in when we did our CG Watch 2012 (which said that, while Singapore has shown a more consistent focus on its corporate governance policy in recent years, it still lags on some basic shareholder rights and governance best practices).

“Disclosure on enforcement action by the regulators also seems to have slowed down this year, and the regulatory regime in Singapore is still less transparent, less discussive than it is in Hong Kong,” Mr Allen adds.

Others believe the Code will help to focus on the efforts of companies already practising, or are keen to adopt, its changes.

Philip Yuen, CEO of Deloitte Singapore and Singapore divisional deputy president of CPA Australia, says: “Many forward-looking companies have started to put in place initiatives to enhance their risk governance framework, board independence, remuneration setting process and talent management, including succession planning. The introduction of the revised Code has given these initiatives renewed imperative and accelerated their implementation timeline.”

Low Weng Keong, a director on the boards of UOL Group and Pan Pacific Hotels, and a councillor and board member of CPA Australia, says: “As with the situation at the time of the introduction of the old Code, we should be mindful that a lot of companies are likely already practising the principles of what are now more overtly required of them, such as with the positive statement that needs to be issued with regard to risk management. While it does, however, focus the attention towards a more structured process of risk management, the requirement for a specific statement to be made to the effect that all significant risks are capable of being identified and addressed introduces a perceived heavier burden on the directors and, in particular, the independent directors.

Good and bad

“The good thing is that it forces minds to be more focused and helps the independent directors to convince management of the need to formalise these processes. The downside is that it could result in excessive attention and, therefore, excessive resources and expenses being applied before the company will sign off on the statement.

“Companies need to be able to see that they should do only whatever might be necessary for their own business and risk profiles. The processes must be there to achieve a stated objective and not there just for the sake of saying that the company has processes in place,” Mr Low adds.

Mr Yuen agrees: “The challenge is to look at the regulatory requirements holistically, beyond mere compliance, and figure out how the changes may be turned into advantages.

“The other challenge is that companies and their boards have to balance short and long-term issues. The shorter-term focus of both regulators and shareholders may give rise to the risk of insufficient time being devoted to longer-term strategic objectives in order to oversee the companies’ response to more near-term regulatory matters,” he says.

In terms of which new Code provisions companies are most likely to struggle with, interviewees believe the sections relating to board tenure and board composition will pose the greatest challenge.

Prof Mak says: “The areas that are going to pose the most challenge will be in retiring independent directors who have served more than nine years, setting guidelines on number of directorships that can be held and disclosing these as recommended by the Code, increasing the proportion of independent directors where the chairman is not independent, and dealing with independent directors who are directly associated with 10 per cent shareholders.

“I think companies are also facing challenges in the areas of risk management, especially those with international operations in difficult markets – what kind of assurance can the board and audit committee really provide in some of their major subsidiaries and operations?

“And, I think, in many other areas, we will just see standard boilerplate disclosures and no real changes in terms of actual practices,” Prof Mak added.

Mr Low says: “Meeting the required number of independent directors on a board is not simply a numbers game. Companies want independent directors who are not already in positions of conflict – such as by being associated with a competing company in the same industry – have expertise falling within the identified board skills mix, have value to add, and have a certain degree of familiarity and level of comfort in terms of how they will fit into the current or desired culture and personality of the existing board. This is reasonable as it reduces the risk of a board falling out of harmony and becoming, at worst, dysfunctional.”

Mr Low adds: “The one item which could possibly face some resistance in terms of implementation may be the requirement to have voting carried out by poll by default and not a show of hands. While it makes a lot of sense in widely held companies with no clear controlling shareholder, there could be situations where companies are more closely held or controlled – sometimes where management might control more than 50 per cent of the shares. The time and cost needed to conduct a poll vote might then be viewed as being something which does not bring value or efficiency to the proceedings, especially as the Companies Act already allows a poll vote to be called.”

New business reality

Going forward, Singapore’s corporate governance landscape will continue to be shaped by best practice guidelines such as the Code, as well as by regulatory forces.

Mr Yuen says: “The recent revisions in various legislations and regulations such as the Code of Corporate Governance, Companies Act and the SGX listing manual have further elevated the maturity of Singapore’s corporate governance landscape. The compliance burden on companies is not likely to get any lighter in the future. At Deloitte, we believe that once Singapore companies come to accept this new business reality, which indeed many already do, we will see the revised Code being internalised and adapted to be aligned with the individual companies’ business model and corporate culture. This will take time, but in the meanwhile companies will have to contend with the expectation of immediate results, given the proliferation of social media, mobile technologies and increased investor/shareholder expectations.”

Mr Allen believes the mindset of the corporate governance culture here needs to change.

“It’s not a matter of just bringing in more rules; it’s about changing the culture of regulation, discussing regulatory decisions, having a more open regulatory regime. Companies also need to rethink their relationship with their shareholders, who would like to meet their directors and independent directors,” Mr Allen says.

Prof Mak believes the Code needs to move beyond being just a voluntary one. “I think we need to rethink how we implement the ‘comply or explain’ approach of the Code. I would like us to go a step further. At the moment, if companies don’t comply, they just explain – and some don’t even do that. The explanations do not say much and often do not address the risks that the guidelines are intended to address.

“Therefore, I think companies that do not comply should explain if they intend to do so in the near future, and what mitigating measures they have in place to address the risks. For example, those that continue to not adequately disclose remuneration and performance measures – how are they addressing the risk of executives being over-compensated or inappropriately compensated, and from management-cum-shareholders taking money from minority shareholders?” he adds.

This is the first in a four-part thought leadership series brought to you by CPA Australia, in conjunction with this year’s CPA Forum on governance and transparency that will be held on Aug 1, 2013.

Next week, we will look at the corporate governance issues commonly faced by group structures.


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