Friday, November 25, 2011

Final recommendations of the CGC

This is a letter from Mr Mak Yuen Teen to BT, dated 24/11/2011, on the final recommendations of the Corporate Governance Council (CGC).
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


My Thots.....

 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".


qiaofeng said...

This is the reply to Mak Yuen Teen's letter...

Published November 25, 2011

Directorships: look beyond the number

I REFER to the letter from Mak Yuen Teen, 'Time to set bolder limits on number of directorships' (BT, Nov 18) and his article, 'Good code, pity about the governance culture' (BT, Nov 24).

It is a shame that the author continues to zero in on the narrow issue of the number of boards a director sits on as the main and decisive factor in determining the director's effectiveness. The Singapore Institute of Directors (SID) has always maintained that the critical concern should be to ensure that boards of companies appoint independent directors who are not only competent and qualified, but also committed to striving to achieve greater board effectiveness. Having sufficient time to spend on company matters is an obvious prerequisite but boards (and their nominating committees) should take care to resist the temptation to engage in simplistic box-ticking exercises by blindly focusing on just the number of directorships that a director holds. The emphasis should be on the ability and willingness of a director to commit sufficient time to serve the company (measured in ability, time and effort, not in number of board seats).

Boards and their nominating committees should make the effort to delve deeper into whether the director actually expends the appropriate time and attention on company affairs, and does not sacrifice the company's interests for his other work commitments and personal interests. Applying a fixed, rigid formula by imposing mandatory and arbitrary limits on the number of directorships across the board for all companies and individuals can be a dangerous and banal exercise in superficiality. It may be easier to stick to a number, but we must not lose sight of the fact that how effective a director is will always be a test of substance over form - much like the test of true independence of an independent director, which is another critical and vital determination that falls upon the nominating committee to make.

SID agrees that each individual has his own limits and every board and nominating committee should work with its directors to decide on the appropriate limit that is applicable to it, taking into account the size, nature, complexity, mix and locations of the company's businesses, and the ability and capacity of the individual directors. This approach has recently been endorsed by the Corporate Governance Council (CGC). The revised Code of Corporate Governance newly issued by the CGC recommends that the board of each company should set its own limit and disclose it in its annual report.

Sovann Giang
Executive Director
Singapore Institute of Directors


My Thots.....

Were Mr Mak's concerns addressed?

"The revised Code of Corporate Governance newly issued by the CGC recommends that the board of each company should set its own limit and disclose it in its annual report."---- meaning No Change.

qiaofeng said...

Published December 2, 2011

Directors' time commitment is the key issue

I REFER to the letter from Mak Yuen Teen, 'Be pragmatic on issue of directorships' (BT, Nov 29). The debate so far may have led readers to think that the difference in opinion on the issue is great when, in fact, it has detracted from the larger issue of time commitment.

First, we both strongly agree that there should be a numerical limit to the number of directorships that a director can responsibly hold. The Singapore Institute of Directors' (SID) preference is that this limit be determined by the nominations committee (NC); Prof Mak's preference is that a maximum limit be set for all and sundry. We have both set out the thinking behind our respective positions.

The proposed Revised Code of Corporate Governance recommended by the Corporate Governance Council (CGC) states: 'The NC should decide if a director is able to and has been adequately carrying out his duties as a director of the company, taking into consideration the director's number of listed company board representations and other commitments. Guidelines should be adopted that address the competing time commitments that are faced when directors serve on multiple boards. The board should determine the maximum number of listed company board representations which any director may hold, and disclose this in the company's annual report.' (Guideline 4.3, CGC)

SID is glad that its view has been endorsed by the CGC in its recommendations.

The subject of multiple directorships has been widely debated in the press and in many forums. Yes, some of our members have expressed the view that a maximum number should be stated in the Code, just as there are those who believe that this should be left to the companies.

But how serious is the issue? An analysis of the 2010 annual reports of 705 Singapore-listed companies done by Aon Hewitt for SID shows that only 41 directors (1.1 per cent) hold more than five directorships of listed companies while more than 93 per cent hold just two or less. With the disclosure requirements of the proposed revised new Code and shareholder scrutiny, such 'overboarding' situations should be easily managed.

We should also remind ourselves that these limits merely help us to focus on the main issue: whether a director can and has set aside sufficient time for the company's affairs. SID concurs with the CGC that the key consideration is time commitment. This must be demonstrated through disclosure and we expect the market to hold NCs and boards to a high standard. We have every right to demand that our independent directors be active and committed board members, and we should not hesitate to hold them accountable if they fail in this regard.

Meanwhile, let us respect the wisdom and decision of the distinguished members of the CGC and ensure that their recommendations are adopted in spirit too, not just in form. We can revisit the subject when the facts are more compelling.

Sovann Giang
Executive Director
Singapore Institute of Directors

qiaofeng said...

For the previous comment, please note that for completeness sake, I posted the reply in the BT, dated 2/12/2011, by Sovann Giang, from the SID to Prof Mak's commentary.

I did not add any of "My Thots" as there were word-length constraints set by blogger.

So here they are....

My Thots.....

Mr Giang says there were only 40 out of 705 (1.1%) who hold more than 5 directorsips. Sounds small and inconsequential, perhaps?

But take 40 and multiply by 6, say (smallest whole number greater than 5) and we have 240 companies!! Remember that it is quite well known that for those in this extreme class, some had like 7 directorships. One was known to have 11 directorships.

Say, if the 240 companies belong to one asset class; say S-chips. Say the IDs belong to a specialty expertise; such as accounting services or legal services..
And U would have a sizeable portion of the SGX ecosystem in some particular vulnerable areas in malfeasance !!

"Wisdom is purified by virtue and virtue is purified by wisdom. Where one is, so is the other."