New Corporate Governance Guidelines PROPOSED (Part A)

Dear friends,

My intention here is to bring together key ideas and comments I can gather so far on each of the proposal.

Background
Singapore's Corporate Governance Council (CGC) was appointed by the Monetary Authority of Singapore (MAS) in February 2010 to review the 2005's version of corporate governance guidelines accepted by Ministry of Finance (MOF). On June 14, 2011, CGC has proposed bold changes to existing corporate best practice guides for MAS acceptance by end 2011.

Proposal - Independence of independent directors
Stricter definition of independence for independent directors (to now include independence from substantial shareholders)

The Council seeks to define "independence" by defining when a director is not independent. How?

• The council suggests that a director be deemed non-independent if he is or has been directly associated with a substantial shareholder of the company in the current or any of the past three financial years.
• The CGC also suggests that a director be deemed non-independent if he has served on the board for more than nine years (the first time a tenure for an independent director has been mentioned.)

The CGC intends to put the respective board, on the spot, by recommending that they should identify, in the company's annual report, each director it considers to be independent.

Comments
Michelle Quah of BT reminded us that the definition of an 'independent' director (to include independence from substantial shareholders) was proposed and rejected by MOF in the last review of the Code in 2005 on the basis that firstly, there was insufficient ground to assume association with substantial shareholders could impair independence as compared to principal-agent relationship for executive directors. Secondly, MOF further assume that there would be an alignment of interest between the substantial shareholders and the REST of shareholders. (I strongly beg to differ. CH Offshore - substantial shareholders sold but the remaining shareholders get nothing. May I also cite the case with Pacific Century.) Michelle recognised that as possible 'expropriation of minority investors' interests by large investors'.

MOF could not take that more stringent definition of independence then possibly due to the fact Singapore's pool of qualified and quality directors is very limited and that possibly almost every one of them, in one way or another, has or had dealings with one another.

But HK and Malaysia have adopted (but is it enforced?) the more stringent definition by making it mandatory ie. as part of listing rules, instead of Singapore's more flexible approach as "guidelines".

Mak Yuen Teen said you can come out with the guidelines and talk about independence but he suggested the following approaches to ensure "independence".

• We allow minority shareholders greater say in the election or re-election of independent directors.
• We must extend the range of sanctions against independent directors who fail to properly discharge their duties and to be more active in taking action against such directors. 

But he concedes that these approaches are beyond the scope of current discussion.


Proposal - Greater disclosure of board and executive remuneration
The CGC suggests that companies disclose the exact remuneration earned by each individual director and the CEO on a named basis, instead of within bands of $250,000 in the current Code.

Michelle again reminded us that the same was proposed and rejected in 2005. The main reason offered by MOF then was to prevent poaching of good directors and consequent escalation of directors' fees. Huh.. are we still living in stone age? Whether a talent would stay on course would depend on many factors beside money. Furthermore, some of the largest listed companies in Singapore have actually been disclosing the exact remuneration of directors and senior management.

For minority shareholders like myself, we need the information to determine value for money paid. I always find it disturbing to see the substantial shareholders, acting as directors and senior managers, paying themselves more than the profit the company made in a financial year. Another example of expropriation of minority investors by large investors?

Reference
Michelle Quah, "Cracking the code of Corporate Governance", Business Times, June 15, 2011.
Michelle Quah, "Will bold proposals survive the fate of 2005?", Business Times, June 16, 2011.
Mak Yuen Teen, "Now let's see the practical impact", Business Times, June 16, 2011.
Mak Yuen Teen, "Unticking the box", Business Times, September 6, 2010.