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

BT
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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".

China's RRR

Is China cutting its RRR (Reserve Requirement Ratio)?

This Reuters article dated 24/11/2011 and the one below, seems to suggest that PBoC could be moving in that direction.

Sources told Reuters earlier this week that the central bank had cut the reserve requirement ratio for five banks in the eastern province of Zhejiang, a centre for private enterprise, by 50 basis points to 16 per cent to support the rural economy.
But the Financial News, published by the People's Bank of China, quoted the central bank's Zhejiang branch as saying that the fall in the reserve requirement ratio for six rural banks to 16 per cent had kicked in automatically after a one-year policy plan expired this month.
Some investors had speculated that the adjustment was part of a government campaign to relax monetary policy in some quarters of the economy. The talk gained traction after a manufacturing survey showed output at a 32-month low in November.
The newspaper said the central bank reviewed the third-quarter loan books of rural banks every November, and banks that did not lend freely to farms were punished with a 50-basis-point rise in reserve requirements.
The six banks in question were penalised a year ago and the penalty lapsed in November, the newspaper reported.
'The revision of the reserve requirement ratio of these banks to a normal level should not be interpreted as a cut in their reserve requirements,' the paper said.

But, it must be noted that the "upping" of the RRR last Nov , was to punish these same  rural banks for NOT lending to the farms.

The following 2nd article, again from Reuters, same date, suggests that the cuts in the RRRs may happen, next yr.

Excerpts....

China could cut its reserve requirement for all banks in the first three months of 2012, a senior Chinese banker said on Thursday, adding to talk that a fast-cooling world economy may lead Beijing to relax monetary policy.

China's central bank has not metted out any substantive monetary tightening measures since mid-July for fear of crimping economic growth at a time when Europe's debt crisis is hurting exports.
'There is possibility of a cut in the reserve requirement ratio in the first quarter, and the tone of macro policy will change during the central economic work conference,' said Huang Jifa, deputy head of investment banking at the Industrial and Commercial Bank of China.
Industrial and Commercial Bank of China is the world's biggest bank by market value.
The central economic work conference is an annual year-end meeting of top Chinese policy makers where a blue-print of the following year's economic policy plans and targets are decided.
The meeting is expected to be held in coming weeks.
'If policy remains as tight as before, some problems will emerge, including in the property sector,' Mr Huang told reporters on the sidelines of a debt conference in Beijing.
The reserve requirement ratio for China's biggest banks is at a record high of 21.5 per cent and has drawn complaints from bank executives, who say the unduly steep ratio hurts profits by restraining banks' ability to lend.

However, I would not bet on this speculation; simply becos Reuters and many in the biz media has always been wrong-footed by PBoC when they were upping the RRRs.....

ID Tenure Limit

I am quite disappointed that the corporate governance code prescription for ID tenure limit  of 9yrs max,  was abandoned.........

See following excerpt from BT article by Lynette Khoo and Kenneth Lim on 23/11/11
Excerpts....

Most key changes proposed to the corporate governance code remained intact - but one was watered down considerably in the final recommendations to the Monetary Authority of Singapore (MAS).

This involved a proposed nine-year tenure limit for independent directors. The Corporate Governance Council has decided, instead, to leave it to the nominating committee to decide whether a director is still independent after nine years of serving on the board. This followed feedback from the industry that a high number of directors will be defined as non-independent if this code is applied.
The Council said it had sought to avoid being too prescriptive in its recommendations. 'We have to let water find its own level,' said Council chairman Alan Chan, who is also chief executive of Singapore Press Holdings.
The Council recommended that the independence of such directors be subject to 'particularly rigorous review', and the board should explain why the director should be considered independent.
A stricter test of independence, which includes recent associations with substantial shareholders, was kept in place.
The Council also maintained the initial proposal that independent directors make up at least half of the board in certain circumstances. The recommendations were finalised after gathering feedback from 75 respondents between June and July.
The Council yesterday shed light on how each decision was calibrated, weighing the varied views among the respondents.
Mr Chan stressed the need to have a balanced Code that is 'workable in practice'.
To facilitate compliance with the revised Code, the Council recommended that a transitional period be introduced such that the Code will only apply to annual reports for fiscal years commencing from July 2012.
Leo Mun Wai, MAS assistant managing director for capital markets, said MAS will evaluate the Council's recommendations and release its response in due course.
Some industry players were disappointed that the term limit for independent directors missed the cut.
HIM Governance CEO Tan Lye Huat felt that the provision should have been kept and the 'onus should be left to the nominating committee or board to comply or explain' as he believes there is no shortage of directors in Singapore.
Stefanie Yuen Thio, joint managing director of TSMP, said there should be compelling reasons for a director to remain on the board after serving for nine years or he should step down for at least two years.
'The 'explain or comply' policy has not been particularly successful in promoting corporate governance' and companies may adopt boilerplate disclosures, she added.
While the Council acknowledged the risks of long tenures on independence, it said boards needed to have discretion in this regard.
OCBC chief executive David Conner, who chairs the subcommittee on board matters in the Council, said he did not expect any companies to 'take the Code lightly'.
The Council also kept unchanged its initial recommendations to let boards decide the maximum number of directorships for appointees; to fully disclose directors' remunerations; and to decide resolutions by polling.
Loh Hoon Sun, managing director of Phillip Securities, was one of the parties who provided feedback on the initial proposals. He suggested that the appointments of some independent directors should be left to professional bodies, rather than the companies themselves. 'Personally I'm a little disappointed that my suggestion was not adopted,' he said.
But Mr Loh felt that the revised Code in general was an improvement over the 2005 version.
Others note that more could be done to address the business relationships that independent directors have with the companies where they serve.
One matter of debate was what constituted material services that would compromise independence of directors. The proposed definition keeps the annual $200,000 threshold over the past year, and extends it to non-profit organisations linked to the director.
Yap Wai Ming, partner at Stamford Law, felt that the threshold of $200,000 for 'material services' could be lowered.

BT

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My Thots...

Are the IDs indispensable?
There are cases of IDs who are way past retirement age who nods off and go to sleep during AGMs, some of them are in their  late 70s or 80s, close to their 90s in age.
I have nothing against age, as some like Richard Hu are old but their wisdom, experience, depth of knowledge and alertness of mind are important resources that could be tapped.
But, for some after 9 yrs, they are bored and they cannot hide their boredom; openly sleeping during AGMs----- those who attend AGMs regularly will attest.
A rotation may help; if they are so "invaluable", as claimed; else, such bored and indifferent IDs, should simply go.

Well, nobody is indispensable. 
Most or  Is it  all IDs cannot live forever......

Bedok Residences

See SGX announcement by Capitaland/Capitamall Asia

On Sunday Night, 500 people were reported to be on the queue.
But, some reporters and naysayers doubted the queue---- they say agents were creating the queues to evoke interest.

But, think about it.
Agents earn commissions, they cannot create demand if there really is none; since they will have outgoing expenses to pay the students/retirees on the queue w/o correspondng incomes.

The OCBC analyst who "kicked tyres"  and did a site check was more accurate.

After enquiring with three agents, however, we found they would only hire a replacement to wait in line if we were committed to buy and submitted cheques. From these data-points, we judge that there is robust demand for the launch and expect a strong sales performance in terms of both units sold and average selling prices later this week.

Indeed, judging by the SGX annnouncement, as at 5pm; 350 units out of the 450 units released for sale on the 1st day is a very good response for Capitaland/CMA.

 Of the total 583 units, 450 units were released for sale today. As of 5 pm today, 350 units have been sold of which 15% are one-bedroom units, 28% are one bedroom + study units, 36% are two-bedroom units, 16% are three-bedroom units, 4% are four-bedroom units and 1% are penthouses. The average price per-square-foot is S$1,350.



Indicative pricing was SGD 1200 to 1400 psf.
So SGD 1350 psf, is on the high side.

The site was bought for S$788.9m in Sep 2010, and has a site area of 268,047 sq ft with a lease term of 99 years (plot ratio 3.5) ====> cost of land psf is SGD 841 psf ppr.

But, this is a mixed development, so cost of land for for the residential dev is probably at about SGD 600 psf with building costs at about SGD300 psf.

At SGD 1350psf vs the SGD 900 psf total costs; GPM approx. 33%.

PARD

 PARD SGX announcement

1st tranche
19.76%  was acquired at AUD 1.78.


2nd tranche
3% at AUD 1.58.

Great Buy.
Management  looking for a substantial stake above 30%, in Tassal?

FED Stress Test

See FRB announcement last nite.

What it involves?
BHC (Bank Holding Cos) or FIs (Financial Insitutions) with total consolidated assets > USD 50 b

Aim
1) To ensure FIs have robust, forward-looking capital planning processes that account for their unique risks, and to help ensure that institutions have sufficient capital to continue operations throughout times of economic and financial stress.
2) Institutions will be expected to have credible plans that show they have sufficient capital so that they can continue to lend to households and businesses, even under adverse conditions, and are well prepared to meet regulatory capital standards agreed to by the Basel Committee on Banking Supervision as they are implemented in the United States.
3) Boards of directors of the institutions will be required each year to review and approve capital plans before submitting them to the Federal Reserve

Required under the newly legislated Dodd Frank Act.
- the Federal Reserve annually will evaluate institutions' capital adequacy, internal capital adequacy assessment processes, and their plans to make capital distributions, such as dividend payments or stock repurchases.
-the Federal Reserve will approve dividend increases or other capital distributions only for companies whose capital plans are approved by supervisors and are able to demonstrate sufficient financial strength to operate as successful financial intermediaries under stressed macroeconomic and financial market scenarios, even after making the desired capital distributions.

Who?
-  the 19 firms* that participated in the CCAR in 2011, also the same 19 that took part in SCAP for TARP.
-  12 additional firms** with at least $50 billion in assets that have not previously participated in a supervisory stress test exercise.

Tests A : Instructions for the 19 firms
Tests B: Instructions for the 12 aditional firms

Tests A are considered one of the most stringent Stress Tests to-date.
Hypothetical stress scenario:
Unemployment  at 13 %
US GDP  fall 8%

Tests B are  scaled-back tests on the capital plans of 12 more financial firms  and considered less complex.

* The 19 bank holding companies participating in the 2012 CCAR are:

Ally Financial Inc., American Express Company, Bank of America Corporation, The Bank of New York Mellon Corporation, BB&T Corporation, Capital One Financial Corporation, Citigroup Inc., Fifth Third Bancorp, The Goldman Sachs Group, Inc., JPMorgan Chase & Co., Keycorp, MetLife, Inc., Morgan Stanley, The PNC Financial Services Group, Inc., Regions Financial Corporation, State Street Corporation, SunTrust Banks, Inc., U.S. Bancorp, and Wells Fargo & Company. These 19 firms also participated in the 2011 CCAR and the 2009 SCAP.

**The 12 bank holding companies participating in the CapPR are:

 BBVA USA Bancshares Inc., BMO Financial Corp., Citizens Financial Group Inc., Comerica Inc., Discover Financial Services, HSBC North America Holdings Inc., Huntington Bancshares Inc., M&T Bank Corp., Northern Trust Corp., RBC USA Holdco Corp., UnionBanCal Corp., and Zions Bancorporation.

Period
3Q2011 to 4Q2013  with exception for trading and counterparty positions according to the Basel III and Dodd‐Frank schedules.

Why?
1)  Key purpose, here is transparency in a time of great uncertainty.
Transparency breeds  and bolsters confidence and keeps out nasty "rumors" about BHCs  B/S exposure to assets in the Eurozone.

2) It will put the burden on the affected BHCs to prove they can make a capital distribution (aka dividends), NOT on the Fed to block it-------likely that BofA and CitiGroup will have to pare down dividends as a result!!

3) Tests B are NOT required under the Dodd Frank Act as these FIs are under the USD 50b cap.
Nevertheless, if they have to go to the FED for aid in a crisis they have to satisfy the tests requirements; and the FED seems to be very prudent and cautious in including these other 12.

KReit Rights Issue - Important Dates

Despatch of Offer Information Statement to Eligible Unitholders : 21 November 2011
Commencement of "nil-paid" rights trading : 21 November 2011 from 9.00 a.m.
Last date and time for splitting and trading of "nil-paid" rights : 29 November 2011 at 5.00 p.m.

Closing Date(1):
Last day for acceptance/application
of and payment for Rights Units/Excess
 Rights Units and close of the Rights Issue: 5 December 2011 at 5.00 p.m. (2),(3) (9.30 p.m. for Electronic Applications through ATMs of Participating Banks)
Last date and time for acceptance of
and payment for Rights Units by renouncees : 5 December 2011 at 5.00 p.m. (3),(4)

Expected date of issue of Rights Units : 13 December 2011
Expected date for crediting of Rights Units : 14 December 2011
Expected date for refund of unsuccessful applications (if made through CDP) : 14 December 2011
Expected date of commencement of trading of Rights Units on the SGX-ST : 14 December 2011