A version of this article was first published in The Business Times on September 5, 2019

By Mak Yuen Teen and Chew Yi Hong

On April 24, 2019, Chip Eng Seng Corporation (CES) announced that it had received a query from SGX-ST the day earlier regarding the disclosure of remuneration in its FY2018 Annual Report. SGX’s query states: “We refer to the Company’s FY2018 Annual Report. As required by Rule 1207(12) of the Listing Manual, please make disclosures as recommended in paragraph 9.2 of the Code or otherwise explain the reason(s) for the deviation from the following Code recommendations. The Company reported that it did not disclose directors’ remuneration in the nearest thousand dollars as it is commercially sensitive. The (top) band for directors was stated as  ‘above $1,000,000’ without an upper limit. Please provide an upper limit to the band.”

The company’s reply said: “Mr Chia Lee Meng, Raymond  (“Mr Chia”) is the Executive Director (ED) and Group Chief Executive Officer (CEO) of the Company, a key management officer of the Company and its subsidiaries (collectively, “the Group”). The Board had decided not to disclose the upper limit to the band of Mr Chia’s remuneration in view of the sensitive and confidential nature of such disclosure. The board believes such disclosure would pose as a disadvantage to the Group as it operates in a highly competitive environment. Such information was accordingly not disclosed in the FY2018 Annual Report to protect the interests of the Group.”

Lack of transparency regarding remuneration

The response is problematic for several reasons. First, CES did not comply with the query from SGX to provide an upper limit to the band for the directors. Second, in the FY2018 annual report, there are three EDs whose remuneration is disclosed within the ‘above $1,000,000’ band, but the company only referred to Mr Chia in its reply. There was no follow up to the company’s reply by SGX. Third, in the annual report, the company also said that “poaching of employees by competitors is fairly common”. Mr Chia is the son-in-law of the honorary chairman, Mr Lim Tiam Seng, and CES was until its recent change of control both controlled and largely managed by the Lim family (with many family members holding positions from the board level down). The company did not elaborate on why disclosure would be disadvantageous. It also did not explain how common it was for relatives of controlling shareholders in family companies to be poached to manage other companies.

In Hong Kong, companies must disclose the exact remuneration of individual directors under listing rules. The lack of transparency relating to remuneration of individual directors in Singapore is also inconsistent with SGX rules on interested person transactions (IPTs), which require IPTs above $100,000 to be disclosed in exact amounts and with the interested person identified. In a report written for the Monetary Authority of Singapore and SGX in 2007, the first author warned that the less stringent rules relating to disclosure of remuneration may encourage certain companies to pay higher remuneration to “interested persons” as an alternative to IPTs.

The potential impact of the 2018 Code

Starting from annual reports for financial years beginning January 1, 2019 onwards, one would hope that explanations such as those provided by CES would become a thing of the past. This is because under the Code of Corporate Governance 2018, all the 13 principles will become mandatory.

Principle 8, which is directly relevant to this issue, says: “The company is transparent on its remuneration policies, level and mix of remuneration, the procedure for setting remuneration, and the relationships between remuneration, performance and value creation.” Provision 8.1 specifies disclosure of the amounts and breakdown of remuneration for each individual director and CEO.

Although companies are allowed to vary from the provisions, the SGX rulebook states that companies must “explain how the practices it had adopted are consistent with the intent of the relevant principle”. It is difficult to see how a company can be said to have complied with the principle that companies should be transparent about the “level” of remuneration if it follows the CES approach.

Remuneration of executive directors and family members

Since CES is reticient about disclosing the individual remuneration of its EDs, especially for the three who were paid “above $1,000,000”, we estimated how much these three EDs were paid. The other two EDs’ remuneration was disclosed as “$400,000 to $599,999” and “$600,000 to $799,999”.

Note 28 in CES’ financial statements relating to related party transactions shows that the compensation of directors for FY2018 was $9,972,000. The Notice of the AGM shows that the total directors’ fees paid to non-executive directors (NEDs) amounted to $359,000 (made up of $337,000 approved the previous year, and an additional $22,000 approved in the April 2019 AGM). Therefore, after subtracting the NED fees, we can determine that the five EDs were paid a total of $9,613,000. If we assume that the two lowest paid EDs were paid at the mid-range of their bands, they would have been paid a total of $1.2 million. Therefore, the other three EDs received an estimated $8,413,000, or an average of about $2.8 million each. However, it is likely that Mr Chia was paid much more than the other two EDs since in FY2017, none of the EDs other than Mr Chia received more than “$600,000 to $799,999” although one of the EDs, Mr Tan Tee How, only joined the board on 2 February 2018 and there is no historical disclosure of his remuneration.

For FY2017, there were four EDs who were paid a total of $6,568,000, although only Mr Chia was paid “above $1,000,000”. The three lowest paid EDs would have been paid an estimated total of between $1.6 million and $2.2 million. Therefore, we estimate that Mr Chia was paid a minimum of  $4,368,000 and up to $4,968,000. I think we can safely say the risk of poaching for Mr Chia is negligible. His remuneration is high even compared to that of CEOs of some of the much larger government-linked companies here, who are by no means underpaid.

CES is even less transparent when it comes to the remuneration of its top five key management personnel (KMP). It does not disclose at all, not even the total remuneration earned by the top five KMP, saying that this is “in the interest of maintaining good morale and a strong spirit of teamwork within the Group”. This sounds very much like the company is concerned about perceived pay inequity within the Group, which may raise questions about the fairness of its remuneration practices among management, and when compared to family members holding various appointments in the group.

CES discloses the remuneration of five employees who are immediate family members of a director, and for FY2018, they are disclosed in bands ranging from “$250,000 to $299,999” to “$500,000 to $549,999”. One of these five employees is the founder and former executive chairman, who in FY2016 became “honorary chairman and advisor”. He was paid between $200,000 and $249,999 that year, starting from April 22, 2016 when he was appointed honorary chairman and advisor, and between $350,000 and $399,999 for the part of FY2018 when he was still honorary chairman. In FY2017, he had received a one-off gratuity payment of $2.4 to $2.45 million for his “life-long contributions to the Company”. Clearly, in this case, “honorary” does not refer to someone who is not receiving remuneration, but instead is intended to be a title for his contributions.

Interested person transactions

CES also disclosed IPTs in several of its annual reports, often related to sales of residential units from properties developed by CES. For instance, there were sales of two residential units in High Park Residences to two family members amounting to a total of just over $1 million in FY2015; sales of four Grandeur Park Residences units to five family members amounting to just over $5.8 million in FY2017; and sale of one Park Colonial residential unit to a family member for $1.25 million. According to the company, directors and employees of the group are entitled to a three percent discount off the list price of the units. There were also IPTs relating to interest paid for, or redemption of, term notes issued by the company.

Board composition

When it comes to board composition, CES has generally complied with the Code of Corporate Governance over the years, but its compliance was arguably more in letter rather than in spirit.

At the time of publication of the 2015 annual report, the board had five EDs, four of whom were related family members – an executive chairman, an executive deputy chairman, an ED/Group CEO, and another ED. The fifth was an ID for 12 years before his appointment as an ED.

The company said that the roles and responsibilities of the Chairman and CEO were held by separate individuals “to ensure that there is an appropriate balance of power, increased accountability and greater capacity of the Board for independent decision-making”. Since CES had an Executive Chairman and the CEO is his son-in-law – and the Executive Deputy Chairman was the brother of the Chairman – the company’s assertion about the separation of roles and responsibilities and its implications are debatable.

The 2012 Code recommended that in situations where the Chairman is not an ID, the board should comprise at least half IDs. This particular guideline became effective for financial years starting from May 1, 2016. In FY2016, CES duly complied. The Executive Chairman became Honorary Chairman and advisor, and the board technically comprised of half IDs. One of the IDs had, however, served on the board since 2003 and the company said the board had subjected his independence to a “particularly rigorous review” and was satisfied that he was independent.

Even though the company now had a single person holding the Executive Chairman and CEO positions, the company said that “the Board is of the view that there is sufficient safeguard and checks”.  In other words, CES was able to justify both combining the Chairman and CEO roles, and separating them among related family members. Again, under the 2018 Code, companies should have to do much more to comply with the mandatory principle in this area if they do not clearly separate the Chairman and CEO roles in a substantive manner.

On February 2, 2018, CES appointed a new ED who was a former principal private secretary to the then Prime Minister and also a former permanent secretary of the Ministry of National Development, among other public sector positions held. It also appointed Abdul Jabbar Bin Karam Din, who became a member of the Audit and Nominating Committees and later took over as Chairman of the Remuneration Committee. With another ED on its board, the company needed another ID to meet the Code’s guideline of half IDs.

Mr Abdul Jabbar is a partner of Rajah and Tann Singapore LLP and “advises companies on corporate governance, compliance and regulatory matters”. Rajah and Tann has been a long-time provider of company secretarial services to CES and Mr Jabbar has been its joint company secretary from as early as 2004 (based on an online Bloomberg profile).

Mr Jabbar resigned as joint company secretary on January 31, 2018, and CES then announced the next day that he was appointed as an ID with effect from February 2, 2018. Given his long-term relationship with CES, his independence would be in question. It would be unfortunate if listed companies are advised that this is an acceptable interpretation of the independence guidelines, even if this complies with the strict letter of the Code.

Change of control

On October 5, 2018, Mrs Celine Tang and her husband Gordon Tang, bought 29.73% of CES shares from the family of the CES founder. Mrs Tang was appointed non-executive chairman. A new ID, Lock Wai Han, was appointed. He has been ED and CEO of OKH Global since October 2016. The Tangs have deemed interests of 44.3% in OKH Global. Again, it is difficult to see how Mr Lock can be perceived to be independent of the new controlling shareholder.

CES has not performed poorly financially over the years and our understanding is that its shareholders had been generally happy with the company under the founding family. We just feel that if CES had taken corporate governance more seriously, it would have been a much better company.

There are also concerns about how the change of control occurred and the impending rights issue that the company is proposing to undertake. Some of the corporate governance issues highlighted in this article, particularly about the independence of directors, can have implications for the proposed rights issue and the company’s fortunes going forward. These will be the subject of a separate article.

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The first author is an associate professor of accounting at the NUS Business School where he specialises in corporate governance. The second author is an active investor and researcher in corporate governance who holds an MBA degree with distinction from the London Business School.