He shows the interlinks of the issues of "tenure of IDs", "specific limits to number of IDs" and why, not being strict with these issues can further accentuate the conflict of interests; as was the case with some IDs who provide legal and accounting services.....
THERE is much to commend in the final recommendations of the Corporate Governance Council on proposed revisions to the Code of Corporate Governance. It is pleasing to see that the council has retained most of its initial recommendations, including extending the definition of independence to include independence from substantial shareholders, increasing the proportion of independent directors in certain circumstances, and disclosure of remuneration of each individual director and the CEO.
Reforms of corporate governance are always subject to resistance from vested interests. The greater impact that a proposed reform will have on boards and companies, the greater will be the resistance. However, it is often precisely those strongly resisted reforms that are needed to create a step-change in corporate governance, as opposed to glacial change, and to transform the corporate governance culture in companies. In my view, the failure to adopt strongly resisted reforms explains why systemic failures in corporate governance still occur throughout the world after years of so-called reforms in corporate governance.
It is therefore disappointing to see the council shy away from tougher guidelines which would have led to more transformational change in our corporate governance culture. Regulators have often cited our top ranking in the Asian Corporate Governance Association's Corporate Governance Watch 2010, while ignoring the fact that the same report indicates that corporate governance culture remains our weakest link - scoring only 53 out of 100.
By failing to bite the bullet more strongly on tenure of independent directors, number of directorships, and conflicts of interest relating to business relationships - and giving a stronger push to board renewal - the council may have lost an opportunity to promote a transformation of our corporate governance culture.
The council has decided to water down the recommendation on the nine-year limit on independent directors by removing this from the criteria relating to independence. It has instead recommended that a 'particularly rigorous review' for directors who have served more than nine years and for the board to explain why a director should still be considered independent after nine years. While many jurisdictions, including the UK and Australia, do allow independent directors to have longer tenure if the companies explain, it is rare for companies to exploit the flexibility accorded by the 'comply and explain' approach, especially when it comes to tenure of independent directors. Active institutional shareholder activism and intense media scrutiny help explain why this is so.
Unfortunately, in Singapore, companies do often tend to adopt an overly technical approach to implementing the code, by using the guidelines in the code as the 'ceiling'. In their minds, these guidelines are meant to reflect 'best practices' and there is little reason to do better than these 'best practices'. Indeed, some are using a pseudo-legal approach to independence, by getting a legal opinion to support the nominating committee's determination of independence, when 'independent director' is not a legal concept.
This brings me to the council's reluctance to recommend specific limits on number of directorships. Some have conveniently touted statistics about the small number of directors who currently sit on multiple boards, but have avoided the statistics that these small number of directors are already omnipresent in many companies.
By not putting specific limits, it will again allow boards following a technical approach to point to the fact that any limit is acceptable because no limit is specified in the code.
It is disappointing that the council did not see fit to consult on whether the code should state specific limits on number of directorships in the guidelines when many have expressed the view over the past few years that specific limits are needed. By not consulting on whether the code should include specific limits, but only consulting on a recommendation that boards themselves set the limits and disclose them, it would have been difficult for the council to now recommend specific limits. As the council has noted, some respondents have advocated that the code include specific limits.
Conflicts of interest
Finally, on the guidelines on independence pertaining to business relationships, the council could also have done more. While it is true that business relationships with other related corporations may not necessarily affect independence of a director especially if these related corporations have few dealings with each other, they could nevertheless pose conflicts of interest for independent directors in some cases.
However, my biggest concern in terms of business relationships is with independent directors who work for firms providing services to companies, such as legal and accounting services.
We have even seen instances of companies with independent directors chairing audit committees while their firm provided accounting-related services. In my view, the council should have come down stronger on these kinds of business relationships.
It should also have lowered the $200,000 annual threshold for business relationships, and included the recurring or non-recurring nature of such relationships in the guidelines. For example, a director whose firm is retained on a long-term basis as its legal adviser should not be considered independent even if the annual amount of fees fall well below $200,000.
The matter of monitoring and enforcing the 'comply or explain' approach is not addressed by the council. However, this is probably more a matter for the Monetary Authority of Singapore (MAS) to consider.
I hope that the MAS will impose a greater responsibility on the Singapore Exchange to monitor and enforce the 'comply or explain' requirement in the listing rules. While it is well and good to raise the bar on the responsibilities of institutional investors, the exchange must also play its role.
Overall, my biggest worry is that while the revised code may help us maintain our high corporate governance ranking and even improve it, our corporate governance culture, implementation and enforcement will remain weak. I fear that complacency and self-delusion will in the longer term come back to haunt us.
The writer is an associate professor of NUS Business School
I have often used the word SGX ecosystem in my posts--- not for want of a fancy word.
If U look deeply into the nature of things, unless U invest entirely out of SGX listed cos. U are affected by the SGX ecosystem.
An "ecosystem" implies that the "organisms" in the ecosystem are interlinked and inter-dependent. Minority shareholders, retail shareholders, IIs (Institutional Investors), Majority shareholder, SGX (itself i.e regulatory and non-regulatory components), MAS, Fundmanagers, Research Analysts, Brokerages and even the biz media are all interlinked and inter-dependent.
Take away all the plankton, the anchovies and the sharks and whales will die off.
But, if each and everyone of the "organisms" in the ecosystem are acutely aware of their inter-dependence, then they will seek to understand how the ecosystem works and to preserve the "balance".
If U are an "organism" in the ecosystem, self preservation means U will want to do what it takes, so as NOT to endanger and destroy the ecosystem. Not just for minority shareholders, but also for the majority shareholders and MAS/SGX too!!
The important question is:
Has the Corporate Governance scene in SG reached the stage of maturity in terms of "awareness" as in say UK, US & Australia, to allow the companies to come up with their own limits.
There shareholder activism is strong with good media scrutiny and support.
Here, we are at the precipice saddled with many rampant recent Corporate Governance abuses.
Faced with no choice , we are at the incipient stages of "being aware" of the importance of Corporate Governance and getting all in the ecosystem involved; so as to help overcome the resistance to current "bad practises".