New governance index for Reits and trusts gives the big picture

Published June 30, 2017

First published in Business Times on June 30, 2017

Mak Yuen Teen and Chew Yi Hong

REAL estate investment trusts (Reits) and business trusts (BTs) have become an important feature of our capital market as Singapore aspires to be a hub for such listings.

As at June 1, 2017, there are 45 such issuers with a primary listing trading on the Singapore Exchange (SGX), accounting for a total market capitalisation of S$85 billion. Of the 45 issuers, six are constituted as stapled securities, nine as pure business trusts and 30 as Reits.

Existing governance indices in the Singapore landscape exclude this important group of issuers because their governance structures and practices, and applicable rules and regulations, are different from companies.

One important difference, for example, is that with one current exception, these trusts are externally managed by a manager or trustee-manager, with the board of directors residing with the latter and appointed by its shareholders, rather than by unitholders of the trust.

Given the unique features of Reits and BTs, we developed a separate governance index for them, supported by CPA Australia. We call this new index GIFT, which is short for Governance Index For Trusts. GIFT, which was first conceptualised more than two years ago, takes into account the business models of these trusts, regulatory requirements, the Code of Corporate Governance, and the October 2014 MAS consultation paper on proposed enhancements to the regulatory regime governing Reits and Reit managers.

For this inaugural issue, we personally assessed all the Reits and BTs using publicly available information from annual reports, websites, results and other SGXNet announcements, and news media reports. We also used anonymous e-mails to investor relations contacts of these trusts to assess actual responsiveness to investors.

The index includes a main section carrying an overall score of 100 points. Eighty points are allocated to the following areas of governance: board matters (20 points), remuneration of directors and key management (10 points), alignment of incentives and interests (10 points), internal and external audit (10 points), communication with unitholders (15 points) and other governance matters (15 points). 20 points are allocated to business risk, assessed using leverage-related factors and other factors such as lease expiry and income support arrangements.

In addition to the main section, there is a section comprising merit and demerit points. Merit points are given for certain practices that we believe Reits and BTs should aspire to adopt, in order to further improve their governance or to reduce their risks.

Examples include putting trust deeds and loan agreements on their websites, and independent directors being expected to hold some units in the trust until the end of their directorships.

The total maximum number of merit points is 25. Demerit points are imposed for cases such as independent directors serving on boards of a related Reit/BT or on an excessive number of boards, high turnover of key management, and non-compliance with rules and regulations. Demerit points can range from one to 10.

We assessed 43 Reits and BTs in this inaugural issue of the index. Those that have not published an annual report or that are suspended are excluded.

The range of overall scores for the 43 Reits and BTs are from a high of 76.5 for Keppel DC Reit to a low of 38.5 for First Ship Lease Trust. The mean and median score is 62.

Under board matters, 36 trusts have at least 50 per cent of independent directors on the board.

Only 17 trusts have one or more independent directors with both relevant working experience in the industry and in asset/investment management, with another 15 trusts having either of such experience. Thirty-six trusts have an independent audit committee chairman with recent and relevant experience in accounting or financial management and 26 have a majority of audit committee members with such experience.

There were situations where we re-designated independent directors to non-independent directors because they have served more than nine years on the board or because they have significant relationships with the trust, manager or sponsor (even where the nominating committee has deemed the director to be independent). We were also stringent in assessing expertise and experience for the board and audit committee.

For remuneration, only seven trusts disclosed the fee structure for non-executive directors, though 33 disclosed the actual fees for each of these directors on a named basis.

Only three trusts disclosed the actual remuneration of their CEO/executive directors on a named basis with a breakdown of the remuneration, while another 11 disclosed in bands of at least S$250,000 on a named basis.

Many Reits and BTs explain non-disclosure of remuneration of CEOs and key officers by arguing that their remuneration is paid by the manager or trustee-manager and not by the trust.

Nevertheless, such remuneration is ultimately borne by the trust and unitholders and excessive or inappropriately designed remuneration packages would affect the efficiency and effectiveness of the manager or trustee-manager in managing the trust.

In terms of alignment of incentives and interests, only 14 trusts link performance fees to total unitholder return, distribution per unit or net asset value per unit, with others mostly linking such fees to net property income.

In the area of external audit, Reits and BTs generally fare well in having reputable external auditors and unmodified audit opinions.

For internal audit, one trust has it in-house, 22 outsource to an independent external firm, and 20 outsource to its sponsor or a related entity.

We believe that the common practice of outsourcing internal audit to the internal audit department of the sponsor may undermine the perceived independence of the internal audit function, especially in providing assurance in areas relating to other functions that may be outsourced to the sponsor and related party transactions.

Reits and BTs generally do well in communicating with unitholders. They often announce annual and quarterly results well ahead of the imposed deadlines, provide notice of their meetings with unitholders well in advance, have well-designed websites, and make presentation materials for annual general meetings (AGMs) and investor briefings available on their websites.

They were generally fast and helpful in responding to our anonymous e-mails seeking information that may be useful to investors.

Of the 43 we contacted by e-mail, 34 responded. We would like to encourage Reits and BTs to put other important information, such as trust deeds and loan agreements, in their websites.

Finally, under other governance matters, one of the key areas we assessed is the working experience of the chief executive officer (CEO), chief financial officer (CFO) and head of Investment or Asset Management in the industry in which the Reit or BT operates. Thirty-two CEOs have at least 10 years of experience in the industry, with another six having at least five years of experience.

For CFOs, the numbers are 23 and 11, respectively, while for the head of Investment or Asset Management, they are 27 and five, respectively. Disclosures of working experience can be improved for some trusts.

One area that no Reit or BT currently covers is putting the manager or trustee-manager up for appointment periodically to improve their accountability to unitholders.

Managers and trustee-managers are entrenched to some extent, with the extent of entrenchment dependent on the stake held by the sponsor and/or controlling unitholder.

We believe that unitholders recognise the value of retaining an experienced manager or trustee-manager and will not trivialise a decision to change even if they are able to.

Perhaps, giving unitholders a right to endorse the re-appointment periodically – effectively an advisory rather than a binding vote – would be a good way to gauge the satisfaction of unitholders with the performance of the manager or trustee-manager.

Finally, for business risk, 21 trusts have weighted average debt maturing at three years or more, and 35 trusts have less than 10 per cent of debt maturing within the next 12 months. Thirty trusts have at least 70 per cent of their borrowings carrying fixed interest rates.

The full index and a report summarising the key findings are available at


Mak Yuen Teen is an associate professor at the NUS Business School who first developed the Governance and Transparency Index (GTI) and the Governance Evaluation for Mid- and Small-Caps (GEMS) and was the Singapore specialist involved in developing the ASEAN Corporate Governance Scorecard. Chew Yi Hong is an active investor who has been involved in several corporate governance projects in Singapore and the region.

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