When the Monetary Authority of Singapore issued a revised Code of Corporate Governance (“the Code”) in May 2012, a few changes stood out.
Chief among them involved the composition of listed companies’ Board of Directors, with the role of independent directors given prominence. An independent director cannot be one who is a “10 percent shareholder” i.e. someone who owns 10% or more of a company’s voting shares, nor can he be an immediate family member of such a person.
Also, should the Chairman not be independent (for example, when the Chairman and CEO are the same person), independent directors should make up half the Board, as opposed to the standard one-third otherwise.
This was a change from the previous iteration of the Code in 2005, which simply stated that “The Chairman and chief executive officer (CEO) should in principle be separate persons…(and) in addition, companies should disclose the relationship between the Chairman and CEO where they are related to each other.”
Many of these changes were aimed at addressing the mistakes that triggered the Global Financial Crisis, which led to creation of a new chapter on risk management within the Code – and which in turn had been created on the back of the 1997 Asian Financial Crisis.
“In the past, risk management was mentioned under internal controls,” recalls Daniel Ee, Director and Council Member at the Singapore Institute of Directors. “Now it’s specifically highlighted as a key area for which boards need to assess the adequacy and effectiveness.”
He adds: “It was widely recognized that the Global Financial Crisis happened because of insufficient attention given to risk management by boards.”
Ee was a speaker at the “Corporate Governance and Sustainable Economic Development In Asia: Stakeholder and Stockholder Perspectives” organized in March by the Wee Kim Wee Centre at Singapore Management University.
Among other things, the “Risk Governance Guidance for Listed Boards” issued together with the Code spells out how the Board can govern risk, such as the crafting of a risk policy that articulates the “level and nature of risk that is acceptable (risk tolerance)” and the allocation of resources to manage these risks.
For example, a risk tolerance statement could read like this: “While we expect a return of 18% on this investment, we are not willing to take more than a 25% chance that the investment leads to a loss of more than 50% of our existing capital.”
These are important safeguards that are meant to protect both the listed company and its shareowners, but Ee acknowledges that it can be challenging for smaller companies to comply fully as they may not have staff and directors who are sufficiently experienced in risk management.
However it is important that they begin to address this important aspect of governance if need be with the help of external consultants.
“For a small company, they might say, ‘I don’t even have enough time to go out and win business, where am I going to find time to set up this risk management system?’” says Ee while pointing out that initiatives by the Singapore Institute of Directors in running seminars and workshops to help smaller companies comply with the Code.
Smaller companies may also have difficulty attracting more experienced people as directors, so much so that “the smaller the company, the more difficult it would be because the (prospective) director would be concerned about whether the company would have sufficient resources to put in place the governance framework,” Ee explains.
“A small company which has begun a process to put in place a risk management system will be able to articulate this to prospective directors.”
Disclosure of pay
The Code also calls for the Board to pay attention to the remuneration structure, including the call for companies to fully disclose the absolute remuneration of each individual director and the CEO on a named basis.
Companies are also required to disclose the aggregate total remuneration paid to the top five key management personnel and to “ensure that the level and structure of remuneration is aligned with the long-term interest and risk policies of the company”.
Disclosing absolute remuneration of top management personnel would be a cause of concern particularly for the smaller companies due to fear of poaching.
Ee says,”They build up a team, and it’s a relationship they’ve built up with the staff. In terms of remuneration, they may not be the market leaders. As a result, they are very concerned that if absolute remuneration is made public, other companies and competitors would poach these people.”
Ee said that there is concern that as Singapore is a small country, “we have to be mindful that when absolute figures are disclosed in public, there is also a risk that it may cause upward ratcheting of remuneration.”
The nine-year rule
The size of Singapore and the talent pool from which to source company directors highlight one other obstacle that listed companies, even the big-cap ones, fret over: the nine-year rule.
The Code defines it as such:
“The independence of any director who had served on the Board beyond nine years from the date of his appointment should be subject to particularly rigorous review. Under such circumstances, the Board should explain why any such director should be considered independent.”
Such a rule could lead to the removal of a director and the loss of the institutional knowledge he has accumulated. Add to that the limited supply of qualified replacements, and one could imagine this to be an issue that Boards will need to deal with.
“The jury is still out,” says Ee, referring to the short period of time – about two years – that the revised Code has been in place. “It’s still early days. We haven’t really seen how companies are dealing with this issue.”
“It remains to be seen whether there will be boards who say, ‘This director is heading into his tenth year, and therefore we regard him as no longer independent. However, we would still want him to continue as a director; in other words, he becomes a non-independent, non-executive director.’ That is a possibility.”
Ee adds, “When that happens, the number of independent directors has to increase; your two-thirds (proportion of the Board who are non-independent directors) become a bit bigger, so your one-third (proportion of the Board who are independent directors) also has to become a little bigger.”
Are you board material?
The Code does not specify how many boards an independent director may sit on, which theoretically means there will not be a shortage of independent directors. The onus, however, is put on the Nominating Committee to decide on how many Boards the company’s independent directors would be allowed to sit.
As corporate governance becomes more sophisticated, how can companies find and groom the right directors to sit on their Boards?
“As to recruiting new independent directors, there are a variety of ways,” Ee explains. “The most formal way is through search firms. A less formal way would be to go through the company’s advisors such as its lawyers, external auditors and bankers, and asking them for names of people who might fit a particular requirement and skill set.”
As for training the directors, the Singapore Institute of Directors runs “various courses aimed at equipping directors to fulfill their roles fully,” says Ee. “They don’t have to be directors before they take the course. Aspiring directors would certainly want to go through the course.”
“Sometimes you might even find people who are holding senior management positions [such as the CEO and CFO] who want to go through the course because they are the ones who are managing the company and would want to have a holistic understanding of corporate governance.”
Many executives who have retired from active senior management roles are well placed to be independent directors. They can provide a steady supply of independent directors to be tapped. Training on governance issues is vital and it is therefore important that they prepare themselves by undergoing training that is relevant for directors.
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[email protected] is an online resource that offers regularly updated business insights, information and research from a variety of sources, including interviews with industry leaders and Singapore Management University faculty. The resource can be accessed at http://www.smu.edu.sg/perspectives. This article was re-edited for clarity and conciseness.
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