Updated on January 8, 2021 to indicate that the initial investment in the Sincere Property Group through interest-bearing loans to be converted to equity was made in May 2019.

By Mak Yuen Teen

City Developments Limited (CDL) is, to many people, the pioneer and flag bearer of the sustainability movement in Singapore and has received numerous ESG-related accolades in Asia and globally.

Its recent troubles with the “G” or “Governance” part of ESG (short for Environmental, Social and Governance) is a timely reminder that good corporate governance must remain a priority for companies, even as institutional investors, regulators and other stakeholders focus increasingly on the “E” and “S” aspects.

Some years ago, a fellow speaker at a conference said that “we” (as in Singapore) have “done the corporate governance part” and it is time to focus on sustainability. I could not disagree more as the “G” part is nowhere near “done” in Singapore or elsewhere, and probably never will be. Some, like myself, believe that it should be “GES” rather than “ESG” and that “G” is the glue that holds everything together.

In my view, CDL, like many other companies, under-estimates the importance of perceptions and spirit when it comes to corporate governance – and so falls short on “G”. It gives the impression that corporate governance is more about compliance with the letter of the rules, rather than imbuing the spirit for long-term value creation and sustained success.

Let me start with the relationships involving companies within the group, the auditors and the independent directors. KPMG has been the long-standing external auditor for CDL (while I am on this, why do the rules not require the date of first appointment of the external auditor to be disclosed, given concerns about the impact of tenure on auditor independence, similar to disclosure of date of first appointment of directors?).

KPMG is a long-standing major tenant in Hong Leong building. In fact, KPMG used to have offices in City House, owned by CDL, and still has its clubhouse there. The independent director who resigned yesterday, Ms Tan Yee Peng, was a former partner of KPMG. Another independent director, Ms Jenny Lim, who is still on the board and chairs the audit and risk committee was also a former partner of KPMG.

The director who replaced Ms Tan yesterday, Mr Philip Lee, was also a former partner of KPMG and retired in September 2018. He was part of the KPMG Singapore leadership team.  He joined the audit and risk committee as a member. Under the 2018 Code of Corporate Governance, the audit committee should not comprise of former partners or directors of the company’s existing auditor within a period of two years after they cease to be a partner or director of the auditor. In this case, CDL has complied with the letter of the Code because it is about three to four months past the two -year cooling off period. However, it now means that CDL’s audit and risk committee is chaired by a former partner of KPMG, with another former KPMG partner as a member.

I can understand that CDL may have been looking for someone with real estate experience, and Mr Lee was the head of the real estate practice at KPMG. The relationships I have pointed out do not necessarily mean that KPMG’s independence as the external auditor is compromised, or that the independent directors who are ex-KPMG partners are incapable of exercising independence.

In the case of Ms Tan, she joined CDL as an independent director about four years after her retirement from KPMG, while in Ms Lim’s case, it was 14 years after she ceased being an advisor for KPMG after retiring about two years prior to that as partner. Indeed, the fact that Ms Tan resigned citing disagreement with the board and management reaffirms that ultimately, independence boils down to independence in conduct, character and judgement. But perceptions do matter – and CDL especially as a company with a global footprint and significant institutional investor following ought to pay more attention to perceptions.

Over at Hong Leong Asia, where Ernst & Young (EY) is the external auditor, Mr Tan Chian Khong is an independent director and chairman of the audit and risk committee. Mr Tan was a former partner of EY, and retired in June 2016 and joined Hong Leong Asia as independent director and a member of its audit and risk committee in February 2018. Following its AGM in April 2018, he became the chair of the audit and risk committee. At that time, the 2012 Code of Corporate Governance was applicable, which recommended a one-year cooling off period. Again, Hong Leong Asia complied with the strict letter of the Code.

What these relationships convey is that the companies in the group do not cast their net very wide when searching for independent directors, and do not pay enough attention to substance and perceptions. This can hurt the company especially at this moment when it is seeking to regain the confidence of investors and stakeholders, given questions raised about its investment in the Sincere Property Group in China and the departures of several directors in quick succession citing disagreements.

Yesterday, CDL also announced the establishment of a special working group to review and improve liquidity for its 51.01% joint venture investment in the Sincere Property Group. It was mentioned that CDL’s former CFO, Ms Goh Ann Nee, who is now the Chief Transformation Officer in the Executive Chairman’s Office, will lead the special working group. I have known Ms Goh for many years. Her knowledge about the business and her experience in China will be helpful for this review, and I have no reason to doubt her professionalism.

Ms Goh left CDL in January 2016 and joined Raffles Medical Group (RMG) as its CFO that same month. In March 2020, RMG announced that she had stepped down as CFO and  appointed as Deputy Managing Director of its China Healthcare Division. Interestingly, RMG did not announce that she had subsequently resigned from the company. Rule 704(7) of the SGX Mainboard Rulebook requires the immediate announcement of appointment and cessation of key persons. By not announcing her cessation when she resigned, does it mean that RMG did not consider her a “key person”? If she had resigned as CFO, her resignation would have to be announced under the rule.

CDL did not announce her appointment either, so it is unclear when she rejoined CDL. When CDL first announced its investment in the Sincere Property Group in May 2019 and extended interest-bearing loans to the latter, Ms Goh had not yet rejoined CDL. In April 2020, CDL re-negotiated the terms of the investment in light of Covid-19, investing a smaller amount than initially planned for its 51.01% stake. It is unclear if Ms Goh had rejoined by then and was involved in the eventual investment decision.  Ms Goh is more likely to be seen as not having a vested interest in this investment and to be able to lead the review with a “fresh pair of eyes” if she rejoined CDL after the final investment in April 2020. Ultimately, whether the special review group would be effective would also depend on whether it has a strong mandate to make recommendations without fear or favour.

The company’s announcement about the special review group has said that notwithstanding the liquidity challenges, the Sincere Property Group remains a platform for future growth in China.  This suggests that the special review group will be doing its review within the parameters of a strategy that the company will not deviate from. The departures of the directors from the board likely go beyond issues of how best to make the investment work – which is the focus of this review –  but whether this is a strategy that the company should persist with.