Thursday, November 17, 2011

Reits- Corporate Governance

The following is a very timely article by BT's Wong Wei Kwong, dated 15/11/2011 entitled   "Don't let Reits be the next wave of governance lapses ."
Excerpted.......

SINGAPORE boasts of a thriving real estate investment trust or Reit sector, but recent events have served another reminder that beneath the glowing surface, there are some key fundamental concerns.

K-Reit Asia, last week, pushed through its plan to buy 87.5 per cent of Ocean Financial Centre (OFC), and raise some $976 million through a rights issue to fund part of the cost. It had earlier announced that it would pay some $1.57 billion to buy parent company Keppel Land's entire stake in the OFC office building. Keppel Land will see a net gain of about $492.7 million from the sale.

 Put before shareholders for their approval at an extraordinary general meeting (EGM), the proposal ran into howls of protest. Shareholders questioned the stiff price and timing of the deal, at a time when the economy is facing a slowdown. Shareholders noted that while the prime Grade A office building in Raffles Place has a tenure of 999 years with 850 years remaining on the lease, KepLand is selling its stake with only a 99-year lease. Others questioned why K-Reit is paying its manager (which is owned by KepLand) an acquisition fee - even though it is buying the asset from its parent company.There were also rumblings about the independence of the manager.
In a nutshell, the EGM brought to the fore two key issues relating to Reits here that corporate governance advocates have been highlighting for some time:
This isn't the first time - and probably it won't be the last - that issues like these arise at a Reit. For some time now, there has been growing disquiet among corporate watchers about weaknesses in the corporate governance structures in Singapore Reits.

Earlier this year, a review of Asia-Pacific Reit markets by the CFA Institute produced less-than-assuring results. Looking at the governance of Reits in Singapore, Australia, Hong Kong and Japan, the institute in its report called strongly for Reit managers to be independent. In the current most common scenario, the Reit sponsor wholly owns the Reit manager, and also holds a large stake in the Reit.

And even before the latest K-Reit development, cases of sponsors selling properties to Reits have triggered concerns about conflict of interest, and unitholders have often questioned the purchase of these assets and how they were priced. The CFA Institute said that to better protect ordinary unitholders, most directors on the boards of Reit managers should be independent of management, sponsors and substantial unitholders.  This should be made law, rather than just a best-practice guide.
There is also the need to have more transparent structures to pay Reit managers and to tie these more closely to performance, and indeed to require all Reits to hold annual meetings for unitholders.

Reits are often presented as defensive plays, and given their yield structures, there is some truth in this. But it would be unfortunate if investors buy into Reits for their relative safety just to have their interests as minorities undermined by weak corporate governance structures. If nothing is done, the Reit sector could be where the next wave of governance lapses emerge, and that would be a pity for a sector that has done quite well so far.


BT

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My Thots......

A stitch in time saves  nine!!

Corporate Governance
Corporate Governance is an evolving process which needs the participation of all------- manager of the Reit, the Board of the Reit, majority shareholders (aka Sponsors), retail/minority Reit investors, not  forgetting SGX and MAS; which encouraged and fostered the ecosystem for the growth of this important asset class.
In the Sg context, Reits can and must evolve into a class of shares in which conservative investors can look forward to regular recurrent dividends payouts (DPUs, DCFs) with relatively low risks and be de-risked from untimely "wants" for cash calls.
 Note: I call it a "want" and not a "need", as it is often the sponsor/majority shareholder whom is the chief beneficiary and decides on the timing for the call. A well concieved Reit with good Reit-able tenants have the luxury of choosing the timing for acquisitions; it is the sponsor who needs to cash out at opportune situations.


Why Reits ?
The raison det're for Reits for the Sponsor/majority shareholders is that it allows monetisation of their assets and serve as a vehicle for recyling the monies; in short, as the last and most important component of the asset recycling model.
The raison det're for Reits for the minority/retail shareholders is that it serves as a defensive investment choice for regular DPUs, given that the Reits tenants are supposedly chosen to give safe recurrent incomes with locked in leases.
For the Asset recycling model to work, the Sponsors must not forget the investors at the end of the food-chain.
Hence, the Reit must acquire properties with good location, which have a stabilised portfolio of proven tenants (in terms of ability to pay),  with a stabilised mix of tenants able to provide that mix of regular recurrent income net of operating expenses and interest charges which can then translate into accretive DPUs.
That said, it implies a period of incubation at the sponsor level, so that the rental profiles in terms of tenant mix, WALE, cost of borrowing  and operating expenses are all quite stablilised.
As  OFC is only 80%  rented out at passing rentals of SGD 9psf with the remaining 20% subject to the uncertainty of the current Office rental mkts (buffeted by the woes of the Eurozone crisis), rental support is an artificiality ------- it is  certainly not real as the tenants are not captured yet and  is an attempt to  substitute  for (get around)  the uncertainties with an explicit guarantee by the majority shareholders (aka Sponsors). One may ask, what if the returns that sponsor was seeking did not materialise, so that the sponsor herself falters and fails,  and will be unable to cough out the guaranteed rental supports ?
Regulators may want to look at the validity and the use of such "Rental supports". How do they know that the sponsor will remain viable to  keep their promissory "Rental supports"?  What if the weaker sponsored Reits, also want a piece of this kind of  "Rental supports" options/actions? 
The issue is that the Sponsors themselves may have hidden agenda and entirely different motivations for unloading the property assets at such a time, completely unaligned to the Reit  biz model.

Kepland, as the prime beneficiary could be trying to lock in the price of OFC before the downturn and eyeing the cash from the monetisation of  OFC for certain "prizes" that they want to capture in a mkt downturn---- in other words, Kepland is trading and timing the buy and sell of property assets which IMHO, is fair as it is in the biz of developing and trading of such properties.

But, for the KReit management and KReit Board,  which is in the biz of finding  a good tenant mix and locking in good rents and rental periods so as to get positive recurrent incomes with positive reversionary outcomes, buying or selling property assets should not be happening in such uncertain periods.

Yes, KReit can cite need for growth, but growth must be from acquisitions of properties that are accretive DPU-wise and whose incomes have truly stabilised.
In this case, KReit is getting itself involved in trading of property assets risks ; as well as risks in the volatilities associated with rentals rates, borrowing costs, as well as risks of a possible rise in gearing (falling property values or NAVs may risk downgrades in debt ratings due to increased gearing;  causing a rise in borrowing costs).

Growth should be according to the schedule guided, well in advance-----OFC was not due to be offloaded by Kepland until end 2012 or early 2013------ so that investors do not get nasty surprises for cash calls; cash which they can use for buying juicy assets at low low prices in these crisis driven environment.

For KReit minority shareholders (as distint from the sponsors who have a  stake in OFC, the choice is between an meagre accretive 2% increase in Proforma DPU vs having to cough out 17/20 of cash for the rights issue.
3 cash calls in 3-4 yrs is an awful record for KReit, and the pliant Board is not taking good care of minority shareholder interests. The worry is in MBFC Tower 3. Will there be another cash call?


Does that mean that minority shareholders should just sell their shares and park the money in others?
To answer this Q, we come full circle, back to the issue of evolving Corporate Governance---- reporters, shareholders, corporate governance watchdogs------ by speaking up , helps to influence and shape opinions and policies in the Reit investment ecosystem.
The number of available safe haven defensive plays in the Sg mkt are few and far between.
Reits can be and should be such an asset class.

Minority Shareholders must speak up, so that the Sponsors (whether TAL for Ascott Reit or Kepland for KReit etc)  realise that such practises are contrary to the practise of good corporate governance; and in doing so,  help effect a change.

Make the Reits you own rise to better standards of Corporate Governance.
I used to subscribe to the thinking of sell and buy another asset/share, if you disagree with management.
But lately, I have another view------Don't just take the easy route of selling, which will in the end limit the number of types of shares of the different assets classes available for investments on the SGX----Speak up and stand up for better Corporate Governance.

Inherently, Kreit and most of the Temasek linked Reits vehicles have very good sponsors (Keppel Corp, FNN, Capitaland etc) and a robust biz model. But, as with every situation when the majority shareholders have complete dominance, minority rights can get overlooked and if undefended, trampled.
Complacency creeps in and the laxity can fester into a downward loop.

This BT article has done good by creating awareness of the Corporate Governance issues and make the regulating bodies be mindful of the possibilities of  the next wave of potential problems.

Bigger Issue
Hence, the issue here, is not really the quality of Kreit, as one may argue that Kepcorp and even Temasek will come in to help even if Kepland should inexplicably fail (which is unthinkable to many given Kepland's pristine record).
The issue is about fostering an environment, an ecosystem,  that is conducive to the evolving Reit class in Sg.
Yes, in terms of size, with 23 listed Reits and mkt cap of SGD 34b, SgX listed Reits has got the heft, but Corporate Governance is a process, more correctly an evolving process and as minority shareholders, we must support, speak up and stand up --- for it is only when we do so,  that the media, NGO watchdogs and regulatory bodies will sit up, listen and act!!




Another
LETTER TO THE EDITOR,
BT...
posted here as it cannot fit into the comments page due to length....

1/12/2011
Regulations governing Reits should be reviewed

I REFER to the commentary 'Don't let Reits be the next wave of governance lapses' by Wong Wei Kong (BT, Nov 15) and the letter 'Tie Reit managers' pay to DPU, valuations' (BT, Nov 16)

The S-Reit market has done well since its inception in 2002. However, I agree that it is time for the Monetary Authority of Singapore and the Singapore Exchange to review the regulations governing the industry.

First of all, the appropriateness of having S-Reits governed by the Collective Investment Scheme (CIS), which was designed to regulate unit trusts, should be reviewed.
While Reits are a trust, they are fundamentally different from a typical unit trust in that Reits are landlord businesses with physical business operations while unit trusts generally trade in securities on stock exchanges. There are potential conflicts of interest in the operations of unit trusts and they are adequately addressed by the CIS regulations.
However, as Reits are physical landlord businesses, the externally managed arrangement of outsourcing the fund-management and property-management functions to external managers opens up many new areas of potential conflicts of interest which are not adequately covered by existing regulations. Examples of these potential conflicts of interest are:
a) The marketing and leasing of space by the property manager, which is usually owned or related to the sponsor - the same team may be responsible for both the properties owned by the Reit and its sponsor.
b) Similarly, the property manager may be managing both the properties owned by the Reit and its sponsor and potential conflicts could arise with regard to, for example:
i) cost being fairly allocated between the Reit and the sponsor's properties; and
ii) some costs incurred by the property manager are reimbursed by the Reit, which creates the risk of the property manager loading tasks and headcounts to the Reit which rightfully should be costs borne by the property manager.
c) Incentives or performance fees earned by the fund manager (based on gross or net revenue, for example) are not in line with the interests of shareholders.

In most cases, the fund manager and the property manager of a Reit are two sister companies owned by the sponsor of the Reit. My understanding is that each has its own profit and loss responsibilities.
The fund manager may not have control over the property manager as it is considered an outsourced party and therefore does not have managerial control over the property manager's staff, as would be the case in a normal corporate structure.
Also, because both entities belong to the sponsor, the fund manager may not be free to terminate the services of the property manager if the latter is not performing. In this scenario, the minority shareholders of the Reit would suffer if the property manager does not perform well.

In the past, investors could trust boards of directors of the fund manager and the sponsors of Reits to have good corporate governance and treat minority investors fairly. However, recent events show that this trust may not be justified.

The argument that the directors of the fund manager will protect the interests of minority shareholders may not work in practice, as all the members of the board of directors of the fund are appointed by the major shareholder of the company which is usually the sponsor of the Reit.

One obvious solution to the above governance issue is to review the wisdom of prescribing an externally managed Reit model. Would it not be more appropriate to require S-Reits to be internally managed which would eliminate most of the conflicts of interest?

The Reit could acquire and 'internalise' the management business based on a proper and fair valuation of the management business. Also, the board of the Reit should be truly independent of the sponsor and the members of the board should be elected by the Reit's shareholders at its annual general meeting.
Tim Turtle
San Francisco
California
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My Thots...

The 2 activities:- 1) Fund Management (FM)  and 2)Property Management (PM) services should reside within the REIT vehicle itself, rather than be outsourced to an external party.
Conflict of interests occur when the  managers appointment are made by the sponsor (aka majority shareholders) or are staffed by the sponsors ----- then they cannot be considered independent!!
PM, FM, Board,IDs,IFAs etc they should ALL be independent !!

6 comments:

qiaofeng said...

I will argue that SGX listed Reits will become more popular as fundmanagers in the west look for safe haven to park their monies.

http://www.businesstimes.com.sg/sub/companies/story/0,4574,465500,00.html?


Published November 17, 2011

Sentiment in Asia-Pac Reit market rising
Market cap up since end-2010; sector in strong recovery from 2008 rut

By MICHELLE TAN


SENTIMENT within the Asia-Pacific real estate investment trust (Reit) universe has improved, according to the Asia Pacific Real Estate Association (APREA).


'At the beginning of this month, the market capitalisation of the Asia-Pacific Reit market was US$168.9 billion, with a total of 191 Reits,' said Peter Mitchell, CEO of APREA. 'This is up from US$156.8 billion at the end of 2010. Excluding Australasia, the market capitalisation of Asian Reits at the beginning of November was US$93 billion with 132 Reits. This compares to US$86.6 billion at the end of 2010.'

In fact, since the global financial rut in 2008, many Reit markets have staged a commendable comeback.

Notably, the Hong Kong Reit market has shown the strongest recovery over the period, up more than 100 per cent, outperforming its benchmark by a 'comfortable margin'.

The sector has also performed fairly strongly on a year-to-date basis, with many Reits managing to claw back part of their earlier losses despite the inconducive macroeconomic backdrop.

In particular, Asia-Pacific Reits have weathered 'external shocks' from Europe and the United States relatively well.

Attributing their overall resilience to a general lack of exposure to European banks and conservative gearing practices, Mr Mitchell also pointed out that several listed real estate funds around the region have even managed to raise capital this year despite the trying times.

The three largest Reit markets in the region - Australia, Japan and Singapore - collectively make up 84.4 per cent of the market capitalisation of all Asian Reits.

Performance-wise, Reits in the three biggest markets have also been outperforming equities, with the earnings yields of their respective Reit indexes coming in above that of broad equity market indexes.

More significantly, Singapore tops the chart in terms of earnings yield, where government bonds are relatively low. This, perhaps, explains the popularity of Reits among investors locally as well as their price resilience towards recent market sell-downs.

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My Thots...

Not only are fundmanagers from the US and Europe looking to park their monies in Asia Pacific Reits, local Reits such as CMT are going abroad to market their Reits.

http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_78FD7331B2A8C84348257949001FB0B0/$file/CMT_Slides_NDR_US_Roadshow.pdf?openelement

So how the Board and Management handles Corporate Governance issues during EGM/AGM are important criteria which will affect their credibility in the eyes of these fundmanagers.

qiaofeng said...

Published November 22, 2011

MAS weighs in on Reit sector debate
By JAMIE LEE


(SINGAPORE) The Monetary Authority of Singapore (MAS) may offer more regulatory guidance to the real estate investment trust (Reit) industry in efforts to boost corporate governance standards, it said yesterday.


MAS did not highlight specific companies but was responding to criticism that current rules governing the Reit sector fail to protect the interests of minority shareholders.

Central to this brewing debate is the $1.57 billion sale of Keppel Land's entire stake in Ocean Financial Centre to K-Reit Asia - a plan that was criticised by shareholders for both the timing and price. The deal was approved but through a show of hands at the shareholders' meeting - a voting system that the Singapore Exchange (SGX) is proposing to ban.

Under a show-of-hands system, each person gets a single vote regardless of the number of shares he holds. The alternative of poll voting gives each shareholder voting rights according to the size of his shareholding.

'The current code on collective investment schemes under MAS, which regulates Reits, is not robust enough to prevent unscrupulous Reits from taking advantage of minority shareholders,' said reader Bobby Jayaraman in a letter to The Business Times on Nov 16.

'The major culprit is the incentive system for Reits, which does not always align with shareholder interests,' he added.

Rather that be compensated based on factors such as the value of assets, net property income and acquisition fees, Reit managers should be paid based on a combination of growth in distribution per unit and market valuation of the Reit, said Mr Jayaraman.

In response, MAS director of communications Angelina Fernandez said in a letter: 'MAS will consider issuing further guidance to the industry as part of our ongoing effort to enhance corporate governance in Reits and other listed entities.'

The regulator reminded companies and boards to uphold high corporate governance standards. 'Corporate governance rules and guidelines cannot envisage all possible circumstances,' Ms Fernandez said.

'When observing such rules and guidelines, companies and their boards must always bear in mind the interests of shareholders or unitholders; and not take an overly technical approach,' she added.

MAS highlighted current rules that are in place to safeguard investor interest when it comes to interested party transactions. For example, transactions that represent at least 5 per cent of the Reit's net asset value are subject to voting by independent unitholders, and two independent valuations have to be obtained - one for the Reit manager, and another for the sponsor.

Limits are also set on the sale and purchase prices, and acquisition fees paid to the manager are in the form of units that can be sold only after a year.


BT
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My Thots....

1) For those who spoke up during the EGM, the efforts did not go to waste, the media picked it up. That generated discussion thru letters to the forum of the biz dailies and has now evoked a response from the MAS.
I do not remember seeing Bobby Jayaram at the EGM.

2) The reply:-
'MAS will consider issuing further guidance to the industry as part of our ongoing effort to enhance corporate governance in Reits and other listed entities.'

3) I hope to see further tweaking of the incentive scheme for Reits and Biz Trusts(which escaped discussion), this round.

4) Reits, as an asset class has been tried and tested out in many global exchanges. For those listed on SGX to stand out and be the " investment choice" of IIs (Institutional Investors), regionally and globally, the standard of corporate governance is of prime importance.

qiaofeng said...

This letter appeared in BT.
For the sake of a more complete discussion, I post Bobby's letter here.


Published November 23, 2011

LETTER TO THE EDITOR
MAS rules do little to align Reit management and shareholder interests


I THANK Angelina Fernandez of the MAS for responding to my suggestions on Reit manager incentives in her letter, 'Rules protect investors' stake in interested party deals in Reits: MAS' (BT, Nov 22).


Most investors are well aware that there are rules such as the ones mentioned in her letter regarding IPT transactions to protect shareholders. However, while these rules look good on paper, in practice they do little to align Reit management and shareholder interests. Let me elaborate on some points raised in the letter:


Independent valuations - these valuations merely summarise the current state of the market and are usually backward looking. They do not take into account potential changes and risks to the commercial property market. A vivid example of this is when CapitaMall Trust acquired Atrium in May 2008, by which time the first tremors of the subprime crisis were already present and well recognised by investors. Yet, the independent valuers ignored the potential risks and gave a peak market valuation of $850 million to Atrium. Three years after, the market valuation of Atrium is significantly less. Bottomline-valuers compensated by the Reit cannot be expected to look after shareholder interests. The stock market is a far better arbiter of valuations.


Voting by unit-holders - in my experience attending AGMs, most unit-holders who come to these meetings are not sophisticated enough to understand the value creating potential of acquisitions. They simply trust the management to do the right thing and can be taken advantage of. Unless voting by poll is made compulsory, this rule has limited use.


Acquisition fees: It does not matter much whether Reit managers are paid in cash or units. The point is that new units issued dilute existing shareholders' stake in the Reit.

The letter states that 'corporate governance rules and guidelines cannot envisage all possible circumstances'. True, but we are talking about a core issue here, which is that the current incentive system does not truly align Reit management and shareholders' interests and unless this is done in a robust way, other peripheral rules have little meaning.

It is worth asking: If Reit managers were paid on the basis of distribution per unit and market valuation growth, would K-Reit have bulldozed its way through the Ocean Financial Centre (OFC) acquisition like they have done?

The day K-Reit announced the OFC acquisition, its stock price fell close to 10 per cent and has continued sliding. Yet, its Reit manager will take home significantly increased management fees while shareholders would have lost a good chunk of their capital even as they bear significantly more risk in the form of higher leverage and potential property devaluations given the uncertain environment.

Bobby Jayaraman
Singapore


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My Thots....

At the KReit EGM, there was an exceptionally long proxy queue with Keppel-related staff "flooding" the EGM, so that during the vote by show of hands, the vote was an overwhelming "NO".
By right as an IPT, Kepland and Kepcorp had to abstain.
Flooding the EGM with Keppel-related staff, ran counter to the spirit of "abstaining"!! and reeks of dubious Corporate Governance.
So the issue was not just of the independence of the Board, but that of the process of EGM.

MAS must seriously look into the "due processes", NOT just the "rules" !!

qiaofeng said...

Mak Yuen Teen's reply to Mr Giang published in the BT.....



Published November 29, 2011

LETTER TO THE EDITOR
Be pragmatic on issue of directorships


IN his letter 'Directorships: look beyond the number' (BT, Nov 25), Sovann Giang, executive director of the Singapore Institute of Directors (SID), said that it is a shame that I continue to zero in on the narrow issue of number of boards a director sits on.


There are many issues that concern me about the state of corporate governance here, but directors sitting on too many boards is one of the most common issues raised by stakeholders in the many conferences I have participated in.

Indeed, my earlier letter was in response to a report that a number of senior industry leaders have suggested limits in directorships.

Therefore, I am far from being alone in zeroing in on this issue. If SID keeps insisting on status quo, are we to just accept its position?

Even a 'principles-based' regime such as the UK has seen it fit to include specific guidelines on tenure for independent directors, and number of other non-executive director positions in FTSE 100 companies held by executive directors (and the limit is one).

Why do we think we can 'out-principle' the developed markets where active institutional investors and intense media scrutiny already provide fairly robust checks and balances?

Mr Giang used the term 'mandatory and arbitrary limits on the number of directorships'. He should know that the Code is not mandatory, so any limits on directorships in the Code would not be mandatory but instead be subject to the 'comply or explain' requirement.

As for arbitrariness, SID itself has issued guidance which includes arbitrary numbers. For instance, in its statement of good practice on 'Fees payable to non-executive directors', it has suggested that:


The board chairman's allowance be an additional 100 per cent of the basic fees of an ordinary director,


The audit committee chairman's allowance be an additional 50-75 per cent of basic fees of an ordinary director,


The allowance for other committee chairmen be an additional 25-50 per cent of basic fees of an ordinary director,


The allowance for being a member of a committee be an additional 50 per cent of allowances paid to their respective committee chairmen,


The maximum fees and allowances for a board chairman should not exceed 300 per cent of the basic fees of an ordinary director, and - the maximum fees and other allowances paid to any one director serving on various board committees should not exceed 200 per cent of the basic fees of an ordinary director.

I think such fee guidance is useful in the same way that I think guidance on number of directorships is useful - even if they involve some degree of arbitrariness.

Guidelines recommending specific fee premiums are no less arbitrary than guidelines on number of directorships. Based on the logic of SID, should not the issue of fee premiums be left totally to the remuneration committee and the individual director too? Why issue guidance on fee premiums but not on number of directorships?

The level of fees will clearly depend on the commitment of directors.

SID should complement its guidance on fees with a guidance on number of directorships as the issues of fees and commitment are closely intertwined. SID should not be pragmatic on the issue of fees, and dogmatic on the issue of number of directorships.

Mak Yuen Teen


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My Thots....

What are the reasons for not imposing a limit on the tenure?
Most likely reason (80% rule) is the resistance to change. 20% could be the other factors cited.

qiaofeng said...

Another letter to BT on the ID issue......



Published November 29, 2011

LETTER TO THE EDITOR
More checks on independent directors still needed


I REFER to the article 'Good code, pity about the governance culture' by corporate governance guru Assoc Prof Mak Yuen Teen (BT, Nov 24) and 'Directorships: look beyond the number' by Sovann Giang (BT, Nov 25).


Prof Mak felt that without caps on the number of directorships held by an individual as well as term limits on independence, we may have lost an opportunity to transform our corporate governance culture.

Mr Giang, on the other hand, says that a rigid formula on the number of directorships would be a dangerous exercise, though I hope he would elaborate further on why this would be dangerous and for whom.

I am pleased that the council is proposing to strengthen the definition of independence. If properly enforced, it would mean that there will be more independence in the appointees on boards of listed companies.

However, while a director may satisfy strict independence conditions upon appointment, the individual may still be constrained from acting independently under the current system.

This is because independent directors (IDs) would still be serving under the auspices of the major shareholder who can vote against the ID's re-appointment or just as easily call a shareholders' meeting to vote out the ID at any time.

One possible solution is that IDs have strict term limits - for example, the discussed nine-year limit. The reason is that when the ID knows that he has a term limit, he would be freer to act independently during his term of service. If there is no limit, there would be a temptation to act chummier with the major shareholder in order to stay as long as possible. Another reason is that after a long length of time of association with the major shareholder, it is possible that the director's independence would be affected.

Another solution perhaps could be a vote by minority shareholders who would ascertain if the director is independent. In this manner, while minority shareholders cannot directly vote out an ID, a minority shareholder vote could remove the director's ID label and the director would become a non-executive director. I believe such a vote would be a better test of independence than letting nominating committees made up of directors to decide on their own term limits and caps.

It is not surprising that some quarters of the directors' community feel that no caps are needed on the number of directorships of listed companies a person can take on when only some tens of directors have more than six directorships compared to the thousands of directors in the market. As an investor though, it is still an issue to me because while the number of 'busy' directors is not large, they affect a few hundred listed companies and this represents a significant number of listed companies here.

Also telling is that major shareholders rarely, if at all, appoint busy directors as non-executive directors but yet are very willing to appoint them as IDs.

I hope that the issues of caps and term limits on IDs can be addressed so that IDs can be free to work professionally and minority shareholders are assured that their interests are looked after.

Ang Hao Yao


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My Thots.....


Very practical considerations that hits the bullseye in the discussion/debate.

"Also telling is that major shareholders rarely, if at all, appoint busy directors as non-executive directors but yet are very willing to appoint them as IDs."----- this probably explains the resistance.

IDs are often recruited to make up the requisite numbers, rather than perform as a check N balance to the EDs.

So establishing that independence is critical and core to the debate.

As I commented previously, the main factor is the resistance to change. In the past, many IDs are probably happy receiving good renumeration w/o having to do much in terms of checks N balances.

Why change?

qiaofeng said...

Article from BT......


Published December 1, 2011

Directors spreading themselves too thin here: study
However, consultant rejects idea of putting a cap on directorships


By JAMIE LEE


DIRECTORS should have the 'self-discipline' to reject numerous board seats, but there should be a limit on how long these directors are deemed independent, said a senior executive at a boardroom consultancy firm yesterday.


This comes as preliminary findings of an Asian study conducted by the company Heidrick & Struggles showed that directors in the region are sitting on several boards, said Robert Knight, regional practice managing partner for CEO and board practice.

'We're seeing some people sitting on 12 to 15 boards,' said Mr Knight at a discussion organised by the Australian Institute of Company Directors. 'It's definitely an overcapacity and they are not effective.'

Mr Knight rejected the idea of a cap on directorships, noting that directors can be sitting on various types of boards that have different demands, adding that the chairman should be able to pick out the less effective directors.

But he argued that there should be a regulatory limit on the tenure of the independent directors to ensure that they remain objective.

'The average tenure is a lot longer than it is in other parts of the world,' he said. 'We've uncovered a couple of directors in a bank in Hong Kong who have been on the board for 50 years.'

The proposed nine-year tenure limit for independent directors in Singapore's Code of Corporate Governance was dropped and instead, the company's nominating committee will decide whether a director is still independent after nine years of service.

Mr Knight noted that board directors in the region are paid at least 50 per cent less than their counterparts in the West, which could explain why some are sitting on more boards 'to earn a living off this'.

'$250,000 is pretty much the top-end,' he added, referring to annual directors' fees in the region.

Directors here attend about four meetings a year, which is fewer than the six to seven meetings that boards in the West hold, the study findings showed.

This partly explains why there are directors in Asia who are sitting on multiple boards, said Mr Knight, adding that the third factor is the lack of qualified directors.

While Asian companies can function well as family- owned entities - a structure that is rare in the West - those in China may face succession problems in the future, Mr Knight noted, citing China's one-child policy. 'In 10 to 15 years, it's going to be very hard for Chinese dads to admit that his son or daughter may not be up to running the company.'

He also supported gender diversity on boards, but cautioned that women of average calibre are starting to be selected over men of better qualifications at companies that need to meet gender quotas implemented by regulators

BT

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My Thots.....

Consultants can recommend and cite best practises.
But, the regulators and the ecosystem must adopt and implement them with the correct vigor, spirit and understanding.


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