Corporate governance

What does the review of the Corporate Governance Code mean for Singapore companies? Joseph Alfred writes

The CCDG (Council on Corporate Disclosure & Governance) has embarked on a review of the Corporate Governance Code ('the Code') for Singapore companies. The Code in force now was issued and accepted by the Government in 2001. The review is intended to introduce improvements to the Code, taking into account feedback received since the inception of the Code and international developments in corporate governance.

The Code is currently non-mandatory and takes a 'comply or explain' approach. CCDG requires companies to state in their annual reports if they have complied with the Code, and, if not, to provide disclosures on these departures from the Code and explanations for these departures.

General perceptions

What is good corporate governance in Singapore? The Corporate Governance and Directors and Officers Liability Survey of listed companies in Singapore, conducted by the CGFRC and published in April 2004, sheds some light. This survey was based on responses from 105 Singapore-incorporated companies listed on the Singapore Exchange (SGX).

The respondents had a high regard for the standard of corporate governance in Singapore. Over half agreed that corporate governance standards in Singapore were comparable to those in the US and UK and was high compared to other Asian countries - except for Hong Kong and Japan - which were considered to have similar standards. Despite this, two-thirds agreed that substantial diversity exists among Singapore companies in their standards of corporate governance and almost all felt that Singapore companies were making an effort to strengthen corporate governance, but they also felt that more should be done to improve corporate governance in Singapore.

Slightly less than half of the respondents were of the view that better corporate governance would have a beneficial effect on financial performance of a company - for example, a higher share price or lower cost of capital. A large percentage was neutral, indicating that there needs to be more specific studies on this relationship as there was a diversity of opinions.

More than half of the respondents were of the view that the majority of directors on the board should be independent directors. The Code recommends that independent directors should make up at least a third of the board. In the US and Australia, independent directors already must make up the majority of the board, while in the UK, at least half the board must be independent.

A large majority of respondents in the survey were of the view that the audit committee should comprise entirely of independent directors. About half also preferred the nominating and remuneration committees to comprise entirely of independent directors. A large majority felt that independent directors should be independent not only from management but also controlling shareholders. The majority agreed that the chairman of the board should not also be the CEO.

The respondents felt that many companies still do not provide education to their directors and officers on their legal duties and liabilities. Not surprisingly, 82% of the respondents agreed that there should be a limit on the number of non-executive directorships in listed companies that can be held by a person in full-time employment. About three-quarters of the respondents felt that the Code should have different guidelines for companies of different sizes.

Over half the respondents expressed the view that government-linked companies in Singapore had better corporate governance than other companies. This was corroborated by the President of the Singapore Institute of Directors (SID), John Lim, when he spoke on the topic of directors� remuneration in Singapore, in a recent talk organised jointly by ACCA Singapore and the SID.

Disclosure of directors' remuneration

The disclosure of directors' remuneration is an area that needs more attention in Singapore. Currently, the SGX requires listed companies to disclose only the number of directors in particular salary bands, but international practice is to disclose the remuneration packages of all individual directors. Associate professor Mak Yuen Teen, vice-dean of NUS Business School and co-director of CGFRC, believes that the disclosure of director and executive remuneration is an area in which companies can improve. In a recent study of all 45 companies on the STI (Straits Times Index) by Standard & Poor's (S&P) and the CGFRC, it was found that only nine companies disclosed the exact remuneration of executive directors while 12 did so for non-executive directors. No company disclosed the exact remuneration of top executives who were not directors, although 30 indicated the amount in salary bands.

In contrast, in the UK, US and Australia, the practice is to disclose the remuneration of individual directors and, in many cases, top executives. This is particularly important in cases where the salaries of a few top executives are disproportionately larger than other staff.

ACCA has argued that individual shareholders must be able to be more effectively involved in decisions over pay and that remuneration disclosures must be made on a timely and fully transparent basis. Paul Moxey, ACCA's head of corporate governance, has urged board members themselves to display more sensitivity to the relative balance of their pay and others in their company - CEOs in the top 100 UK companies are typically paid 80 times as much as the average worker. It is possible that similar ratios could be found in Singapore, but the information is not readily available.

Singapore companies need to be more open, not only about pay packages but also the formula used to decide that package. Said Professor Mak: 'We should not focus on how many dollars executives are paid but the formula used. It would be useful for investors to have a remuneration statement to say what sort of remuneration can be expected if a performance target is met.' The UK's Directors' Remuneration Report Regulations 2002 require the remuneration policy to include, for each director, a detailed summary of any performance conditions to which any entitlement of the director to share options is subject, an explanation of why any such performance conditions were chosen, and a summary of the methods to be used in assessing whether any such performance conditions were met, and an explanation to why those methods were chosen.

The Code recommends that each company provides a clear disclosure of its remuneration policy, level and mix of remuneration, and the procedure for setting remuneration, in the company's annual report. It also states that companies are encouraged, as best practice, to disclose fully the remuneration of each individual director, including details of employee share schemes, to enable their shareholders to assess the benefits and potential cost to the companies. Such information is mandatory in many countries.

Joseph Alfred is technical manager of ACCA Singapore.