|
SIAS Position Paper On Corporate Governance Preface
Corporate governance has always been a very relevant and important subject. Lately, in view of some spectacular instances of abuse and excess especially in America, corporate governance has become not only the concern of the business community and the authorities but also of the general public. We in SIAS fully support the continuing efforts in Singapore to improve the corporate governance in our listed companies as better corporate governance clearly translates into a better and fairer deal for our investors. We set out below what we would like to see as the best practices of corporate governance. They cover the independence of the board in supervising and monitoring management, the remuneration of senior executives and directors including the granting of stock options, accountability and disclosure to shareholders and other stakeholders, and the appropriate relationship between the company and shareholders. Recognizing the wide diversity of circumstances in which companies operate, it would be inappropriate to advocate very specific rules. For example, SIAS makes no attempt to formulate the "correct" remuneration for executives or dictate how stock options should be awarded. Underlying the recommended best practices are the principles of independence of the directors and auditors and accountability and disclosure to shareholders. We believe that these are the most practical and effective checks on abuses and excesses because one has to be more careful, moderate and rational when one is subject to scrutiny and may need to account for his decisions and actions. SIAS agrees fully with DPM Lee Hsien Loong that the spirit of good corporate governance is more important than specific rules and regulations. We would like to see the adoption of a new mindset by all parties. We urge directors to be truly independent in spirit in representing and serving the interests of all shareholders. We would like to see management being more candid in reporting the company's performance to shareholders, including its problems and challenges. We also call for greater and more candid disclosure of projections and plans by companies; we feel that companies which do not meet forecasts should not be censured as long as there are good reasons for the shortfall and they made the original announcements in good faith and without any intention to mislead the market. Finally we urge directors and management to accord more respect to minority shareholders and make greater efforts to accommodate their legitimate concerns. Board and Directors Separation of Chairman and CEO
SIAS agrees that the separation of the two roles is more conducive to the proper supervision of management by the board which represents primarily the shareholders. However, in the case of a majority family owned company, it is understandable for the CEO who is also the major shareholder to be Chairman of the Board. Senior Director
Where the Chairman is not an independent director, there should be a director - he could be the chairman of the audit committee - designated to be the spokesman and coordinator of the independent directors. Number of Independent Directors
The present Code on Corporate Governance stipulates that independent directors should form no less than one third of the total board. Studies have shown that a board with a majority of independent directors is more likely to be effective in replacing an underperforming CEO and rejecting M&A proposals. As such SIAS encourages boards to have a majority of independent directors. Independent directors
As DPM Lee Hsien Loong said, the spirit is more important than specific rules and regulations. While the rules relating to the number and definition of independent directors are welcome, SIAS notes that in law all directors should be independent in that they owe their sole allegiance to the company and not to the person who nominated them or any other party. We would like to see a board culture develop under the Chairman and the CEO where discussion and the voicing of different views are encouraged and management is open in its dealings with the board. In addition, independent directors should be able to meet without the executive directors and independent directors should have free access to company executives and information. Board committees
Board committees are established not only to allow better focus on specific issues but often also to separate owner interests from management interests and hence enhance the supervision and control of management. In this respect SIAS supports the structuring of the audit committee, the nominations committee and the remunerations committee to consist entirely or mainly of independent directors. Number of directorships
Taking into account the growing time commitment required of a director to do a good job, SIAS believes that a person holding a full time position should not be a director of more than four listed companies while a "professional" director should not be a director of more than six listed companies. Availability of qualified directors
SIAS does not believe that there is a shortage of qualified directors in Singapore. The main qualifications are integrity, independence and skills. SIAS notes that Singapore Institute of Directors has many members who have offered themselves for appointment as independent directors. Information on directors
SIAS agrees that information should be provided on individual directors and key managers in the annual report so as to encourage the appointment of suitably qualified people to these positions. Education of directors
In view of the professional requirements of the job and to enhance the quality and effectiveness of directors, SIAS is in favour of a more thorough orientation and education for new directors and continuing education for existing directors; this is appropriate in view of the constantly changing business environment and regulatory framework. More experienced directors can also share their knowledge and experience with newer directors. Remuneration Management remuneration and disclosure
There has been public concern over the escalating level of remuneration given to CEOs and senior management and the perceived excesses in some instances. SIAS advocates the complete disclosure of remuneration of individual board members and the top three senior management members in the interest of transparency. With full disclosure, remuneration would tend to be more rationale and justifiable as there would inevitably be hard questions at shareholders meetings and by analysts and the media if remuneration was perceived to be far out of line. Board remuneration
Director remuneration has generally been moderate. SIAS welcomes the recent trend towards rationalization and differentiation of director fees to recognize additional duties of some directors who are chairmen or members of board committees. Restraint
SIAS advocates that companies exercise responsibility and self-restraint in determining remuneration to directors and senior management. While disclosure will help curb excessive remuneration as it renders such remuneration more awkward to justify, the fact remains that even if the remuneration is required to be approved at AGM, it is rarely possible for shareholders to defeat any proposal put forward by the board. Stock Options Stock option excesses
When stock options are awarded, they must be carefully designed as a part of remuneration and must be justified by the value that they produce for shareholders. SIAS is particularly concerned about excesses pertaining to the award of stock options - aggravated by the fact that the associated cost is often not recognized or is underestimated. As in the case of overall remuneration, SIAS believes that full disclosure of stock option awards and their associated cost is the best practical action against excessive stock options. Cost of stock options
While there is no accounting standard at present for the treatment of stock options, the non-accounting of stock option cost clearly runs against the spirit of transparency. SIAS strongly advocates that where stock options are granted, the associated cost must be recognized - at least as a footnote pending the formulation of an accounting standard. Pricing of stock options
SIAS disagrees strongly with the pricing of stock options at a discount to prevailing market price because such a formula may reward management even when the share price declines after many years. Secondly, SIAS disapproves strongly of any attempt to reprice the options downwards or to lengthen the vesting period. Accountability and Disclosure Audit committee
SIAS supports the establishment of an audit committee consisting entirely of independent directors who are properly qualified for the task. Auditors and other professionals
SIAS supports the principle that the auditors and other professionals such as investment bankers and analysts are depended upon for their professional and independent opinions and advice and as such anything that compromises this independence should not be condoned. Frequency of reports
After considering the costs involved and the argument that quarterly reporting promotes short term focus amongst management, SIAS is still of the view that quarterly reporting should be compulsory for all listed companies because of the benefit of timely financial information to shareholders and other stakeholders. Format of reports to SGX
SIAS welcomes the new announcement to do away with the prescribed reporting format. A company should of course report results according to prescribed accounting standards and in a consistent format meaningful for its business and approved by its auditor. Annual reports
SIAS would like to see a more candid report to shareholders of the company's performance, including its problems, rather than just a one-sided public relations treatment of management's achievements and the omission or minimization of its shortcomings. Segmental information
Currently, a company needs to provide the turnover and profit before tax for its major business segments. SIAS would also like to see the attributable net profit after tax figure which is the key figure showing the importance of each segment to the group. Forecasts and plans
It is useful for shareholders to have forward looking statements. In this respect, SIAS feels that companies which do not meet forecasts should not be censured as long as there are good reasons for the shortfall and they made the original announcements in good faith and without any intention to mislead the market. Otherwise, there will be a natural bias toward overly conservative projections and saying as little as possible. Shareholders Shareholders using CPF funds
CPF investors have invested a total of $8 billion in Singapore equities but they are not recognized as shareholders and have no right to speak or vote at AGMs. SIAS appeals to the authorities to rectify the situation so that these CPF investors who have invested their own money in the companies can gain their rights as shareholders. Treatment of shareholders
SIAS would like to see directors and management accord more respect to minority shareholders and make greater efforts to accommodate their legitimate concerns. After all, in the English corporate model that we follow, the company exists primarily for the benefit of the shareholders. Active participation of shareholders
SIAS would also like to see shareholders participate more actively in the deliberations of shareholders meetings. It urges shareholders to be responsible and be better prepared to contribute meaningfully. In this respect, SIAS is active in conducting numerous seminars, courses and workshops to help investors to be better educated and informed.
|
Back to top
