First published in Business Times,  May 07, 2013

Mak Yuen Teen

SOME years ago, I was participating in a panel discussion overseas on remuneration and someone argued that disclosure of executive remuneration in annual reports poses a security risk because it makes executives the targets of kidnappers.

I replied, rather facetiously, that it was good that someone was reading annual reports, even if it were kidnappers. The point that I was really making is that kidnappers don’t really read annual reports to identify kidnapping targets, just as companies and headhunters don’t read them to identify poaching targets.

Another time, I was told that a CEO did not want his pay to be disclosed because he did not want his wife to know how much he was paid “perhaps so that she does not find out how much he was giving to his other ‘wife'”. Yet another told me that one CEO’s wife was complaining that he was paid much less than another CEO because the two CEOs’ wives were comparing disclosures in the annual reports. Apparently, instead of comparing the usual information about their husbands, these spouses were comparing their pay.

It seems that when it comes to avoiding transparency in remuneration, there is no shortage of excuses. Most, however, simply cite “competition for talent” or “fear of poaching” as reasons to avoid disclosure. These reasons are particularly absurd in cases where those whose remuneration is hidden are themselves major shareholders of the company. Seriously, who would try to poach someone who is a major shareholder of a founder- or family-controlled company to be an executive of another unrelated company?

Companies that cite “fear of poaching” for not disclosing remuneration may be fearing something else – perhaps fear of acute embarrassment from pay being seen as too high or fear that disclosure would cause unhappiness within the company due to perceived inequity.

In April, after many companies with December year-ends had released their latest annual reports, the Singapore Exchange (SGX) was busy querying companies about their failure to fully comply with rule 1207(12) relating to the guidelines in the Code of Corporate Governance on the disclosure of remuneration of directors, key executives and employees who are immediate family members of directors or CEOs.

Rule 1207(12) states: “The issuer should make disclosure as recommended in the Code of Corporate Governance, or otherwise disclose and explain any deviation from the recommendation.”

I counted 51 companies which were queried on this last month. Nineteen companies responded with additional disclosures which allowed compliance with the Code guidelines. The other 32 did not make the additional disclosures necessary to comply with the guidelines. Of these, four did not disclose the names and/or percentage breakdown of remuneration components for their key executives, citing competition, fear of poaching or confidentiality reasons. Twenty-one disclosed remuneration information for fewer than five executives (as recommended in the Code) because they pointed out that other than directors and the CEO, the company did not have five key executives or key management personnel. The remaining seven declined to disclose remuneration for directors and/or key executives beyond a top band of $500,000 and above, citing competition or fear of poaching.

Let’s first look at the 21 companies that disclosed remuneration for less than five executives. Clearly, these companies have taken the Code’s reference to “key executives” (2005 Code) and “key management personnel” (2012 Code) to mean that they only need to disclose for the number of “key executives” or “key management personnel” that they have (other than directors and the CEO). The term “key management personnel” is defined in Financial Reporting Standard 24 (FRS 24) on Related Party Disclosures to mean “those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity”.

Many may interpret “key executives” and “key management personnel” to extend only as far down as those who report directly to the CEO. It would be true that many companies will not have five people directly reporting to the CEO after excluding other executive directors. Perhaps the Code should be amended to cover the top five highest-paid executives, instead of top five key executives or key management personnel.

The SGX should also review rule 1207(15) which states: “If a person served in the capacity of a director or key executive for any part of a financial period, disclosure is required of the person’s actual remuneration for the period that the person had served as a director or key executive.”

It is probably not the intent of the SGX to prescribe a higher standard of remuneration disclosure in its listing rules than what is in the Code. However, rule 1207(15) as it is written may be interpreted to require the disclosure of the exact amount of remuneration, at least for individuals who have served as a director or key executive for part of a financial period. The intent is probably for such disclosure to be similar to what is recommended in the Code. It should also be noted that rule 1207(15) is stated as a requirement and is therefore not merely “comply or explain”.

The sky’s the limit

It is the seven companies that continued to maintain the use of a top band of “$500,000 and above” which concern me most. It is like me saying that “I weigh more than 50 kg” when asked about my weight. In these seven companies, executive directors are substantial shareholders, collectively owning from around 10 per cent of equity to more than 70 per cent in one case. In these companies, they would have significant influence over how much they get paid, for example, through their ability to influence the appointment of independent directors serving on remuneration committees.

If we look at the key management personnel’s remuneration disclosed in notes to financial statements, they ranged from $4.8 million to about $40 million. Thanks to FRS 24, information on total key management personnel remuneration is available for scrutiny by shareholders, although the “principle-based” definition of “key management personnel” in the standard means that there is considerable variation in number of persons included in this category across companies, and this number itself is not disclosed.

In two of the seven companies, key management personnel’s remuneration was 20-30 per cent of dividends paid; in another two it was just over 60 per cent; and in another two (which are related companies) it was almost or more than 100 per cent. One was loss-making and did not pay any dividends. In other words, remuneration to key management was high relative to distributions to shareholders in several of these companies.

Executive remuneration deserves a lot more attention from investors and regulators here than they have been getting so far, for several reasons.

Firstly, disclosure on remuneration here is still well behind those in other developed markets. While some companies, especially the larger ones, have become more transparent in disclosing remuneration of key executives, the disclosure of performance measures lags behind other markets. In some markets, disclosure of performance targets (ie what key executives are expected to achieve to earn “target” and different levels of short-term and long-term incentives) is also expected. Without disclosure of performance measures and targets, it is impossible for shareholders to assess if remuneration is fair.

Secondly, the pay of the CEOs of many of our large companies, including those in some of our government-linked companies (GLCs), have become high even when compared with CEOs of global companies, when we consider how much larger and complex the latter are. But at least for these large local companies, we generally have a good idea as to how much the senior executives get paid. But this is not the case for a good number of founder- and family-controlled companies.

Thirdly, excessive executive remuneration presents a clear and present risk for minority shareholders, especially in founder- and family-controlled companies where executive directors and key executives are often substantial shareholders or their associates, and are able to significantly influence how much they get paid. For example, if a CEO owns 20 per cent of a company, he would obviously much prefer to receive $1 million more in remuneration, than $200,000 through his 20 per cent share of a $1 million increase in dividends.

Fourthly, safeguards against inappropriate remuneration policies and excessive remuneration are weak. Remuneration committees also often lack the expertise to properly grill the remuneration consultants on their recommendations on executive pay. The Code does not prescribe any particular skill sets for the remuneration committee, unlike the audit committee. The independence of the remuneration consultants may also be in question, especially if they are doing other work for management. Their ability to formulate robust recommendations on remuneration is also often hindered by poor disclosure and lack of sufficient and relevant data to do proper benchmarking of remuneration.

As more countries have already moved beyond just disclosure and are now giving shareholders a “say on pay” for directors and senior executives, we should at least be giving shareholders better information about the remuneration levels and policies applicable to directors and senior executives here.