21 March 2001
1 Corporate governance refers to the processes and structure by which the business and affairs of the company are directed and managed, in order to enhance long term shareholder value through enhancing corporate performance and accountability, whilst taking into account the interests of other stakeholders. Good corporate governance therefore embodies both enterprise (performance) and accountability (conformance).
2 There is, however, no conclusive evidence that any one model of corporate governance leads to superior corporate performance. This is because the appropriate governance model will vary not only between companies but also over time for any individual company. This is particularly so given the speed with which new companies are forming and the fundamental changes to corporate structures being wrought by new technologies and globalisation. These changes will result in quite different models of corporate governance emerging from those to which we are accustomed.
3 Nevertheless, good corporate governance matters, especially in situations where there may be significant conflicts of interests between shareholders and Management, such as in certain corporate acquisitions; management buyouts; financial reporting; performance appraisal, hiring and replacement of senior management; and executive compensation. Investors, especially international institutional investors, increasingly demand high corporate governance standards in companies that they invest in.
4 In a recent McKinsey Investor Opinion Survey of 200 institutional investors, 89 percent of respondents in Asia said that they would pay more for the shares of a well-governed company than for those of a poorly governed company with comparable financial performance. The fact that a majority of investors say they already take corporate governance into account when making investment decisions is a powerful argument in favour of corporate governance reform.
5 In addition, with the intent of improving corporate governance in a corporation and promoting enterprise and accountability, the World Bank and OECD established an Investor Responsibility Taskforce. Specifically, the Investor Responsibility Taskforce seeks to ensure that countries and companies are properly rewarded by the markets if they make governance reforms. With more than $3 trillion in assets managed by its members, its objective is to encourage investors to pay more attention to corporate governance issues so as to speed up the flow of funds to those countries and companies that make progress on the reform agenda.
6 In Singapore, the results of the Pricewaterhouse Coopers ("PWC") Corporate Governance Survey of Institutional Investors, published in 2000, indicated that we need to continuously improve its standard of corporate governance, to provide a climate conducive to the orderly development of the capital markets and to meet the increasing expectations of investors.
7 This Report and the accompanying Code of Corporate Governance ("Code") seeks to encourage Singapore listed companies to enhance shareholder value through good corporate governance. It is not meant to be a panacea. It, however, recognises the need to balance enterprise and accountability in creating long-term shareholder value. It allows companies flexibility in choosing its approach to corporate governance, subject to appropriate disclosure to, and approval by, shareholders. Companies must take upon themselves the responsibility for adopting governance practices best suited to their circumstances, built around sound principles. The principles and guidelines in the Code are not meant to unduly restrict corporate governance policies and practices. Each company must decide which governance practices are relevant to investor decision-making and make disclosure accordingly. The market will judge each approach as it sees fit.
8 However, in order for shareholders to have a sound basis for making their investment decisions and to assess the appropriateness of a company's corporate governance practices, companies must provide appropriate disclosure of their corporate governance framework and practices. Such disclosures would also allow other market participants to play a more active role in promoting good corporate governance by companies.
Alternative Approaches to Promoting Good Corporate Governance
9 In theory, there are at least three possible regulatory approaches to promoting good corporate governance:
1. A prescriptive approach that requires companies to adopt specific corporate governance practices;
2. A non-prescriptive approach that allows companies to determine their own corporate governance practices, subject to appropriate disclosures of corporate governance practices that are adopted; and
3. A balanced approach that specifies corporate governance best practices but allows companies to depart from these practices subject to appropriate disclosure.
10 Although a prescriptive approach may be appropriate in certain circumstances, for example where capital markets are undeveloped, such an approach is inconsistent with the disclosure-based philosophy to regulation that Singapore is moving towards. Further, a prescriptive approach assumes that a "one size fits all" approach is appropriate, but as discussed earlier, what is good corporate governance is likely to vary across companies and over time.
11 A non-prescriptive approach to corporate governance is probably best exemplified by the approach in the US. In the US, the Securities and Exchange Commission ("SEC") and the various stock exchanges generally do not prescribe corporate governance practices that companies should adopt, although some private sector bodies and major institutional investors have developed codes that embody what they consider to be good corporate governance. Instead, the SEC and the stock exchanges emphasise high disclosure standards, including disclosure of corporate governance practices that companies have adopted, so that investors can assess the corporate governance of companies they invest in. Even in the US, however, there are instances where specific corporate governance practices are prescribed — a good example is the requirement of the New York Stock Exchange ("NYSE") and NASDAQ for listed companies to have an audit committee with at least three directors, all independent. Australia is another example of a country that has adopted a largely non-prescriptive approach. Companies listed on the Australian Stock Exchange ("ASX") are required to describe specific corporate governance practices that they have adopted, and companies are encouraged to pay attention to best practice recommendations that have been published. However, the ASX has not adopted a specific corporate governance code that companies should follow, nor does it require companies to disclose non-compliance with any particular code.
12 A balanced approach is also followed by markets that adopt the disclosure-based philosophy to regulation. For example, the Canadian and UK markets largely follow the disclosure-based approach to regulation but have nevertheless adopted codes of corporate governance that include fairly extensive specification of corporate governance practices that companies should adopt. However, the flexibility to companies is preserved in most areas through the voluntary nature of these codes. Subject to appropriate descriptions of corporate governance practices and disclosure of non-compliance with specific provisions, companies can depart from specific provisions in the code under the Listing Rules.
13 After careful consideration of the disclosure philosophy that Singapore is embracing, the state of development of the Singapore capital markets, and the institutional features of the corporate governance landscape (including the ownership profiles of Singapore listed companies and the activism of shareholders), the Corporate Governance Committee ("CGC" or "Committee") has decided that, at this particular time, the balanced approach adopted in markets such as the UK and Canada provide the best approach for improving corporate governance in Singapore. The Committee proposes that all companies listed on the Singapore Exchange ("SGX") be required, as a requirement in the Listing Manual, to give a complete description of their corporate governance practices with specific references to each of the guidelines set out in the Code, and where they deviate from these best practices, they should disclose these non-compliance with appropriate explanations. In CGC's view, while the SGX has the responsibility of ensuring that listed companies disclose their corporate governance practices as well as their reasons for any deviation from the Code, the quality of the explanations is for the market to assess and judge.
14 The CGC is cognisant that companies need time to gear themselves up for the higher standards of corporate governance and disclosure, and requiring immediate compliance may result in the letter rather than the spirit of the Code being followed. Listed companies are thus required to disclose their corporate governance practices and give explanations for deviations from the Code in their annual reports for Annual General Meetings ("AGMs") held from 1 Jan 2003 onwards. However, listed companies are encouraged to comply with the Code before that, if they are able to do so.
15 It is hoped that the companies would observe the spirit, and not just blindly follow the letter of the Code, as the latter may not always achieve the intended results. On the issue of independence, for instance, it could be argued that two directors, who whilst unrelated to each other, but who have been friends since young would not be likely to deal with each other with objectivity. Conversely, it may very well be the case that two directors who are related to each other would be less restrained in being critical or offering contradictory viewpoints to each other.
16 As the Singapore capital markets deepen and mature, and as market mechanisms for promoting good corporate governance develop, the approach recommended by the CGC can be reviewed in future and can evolve accordingly.
The Code of Corporate Governance
17 Before deciding on the recommendations, the CGC conducted a month-long public consultation in December 2000. It received numerous feedback from various quarters, many of which were positive. The Committee felt encouraged by the level of interest in this matter and the reassuring comments, and would like to take this opportunity to thank those who had contributed to this process. Several of the points raised in the feedback have indeed been incorporated into this Report and the accompanying Code.
18 The objective of the Code is not to prescribe corporate behaviour in detail but to essentially secure sufficient disclosure so that investors and others can assess a company's performance and governance practices and respond in an informed way.
19 The Code is divided into four main sections:
• Board Matters;
• Remuneration Matters;
• Accountability and Audit; and
• Communication with Shareholders.
20 The recommendations are presented in the format of principles and guidance notes. The Committee now sets forth its underlying thoughts in arriving at the recommendations.
21 In the McKinsey survey (2000), 77 percent of the respondents in Asia ranked board practices to be at least as important as financial issues in stock selection. Indeed, there is no substitute for having good board practices and ensuring the integrity of members appointed to the Board of Directors. Without integrity, companies may be able to meet prescribed rules and yet still frustrate the intent of any corporate governance code. Meeting the form but not the substance of the Code would not lead to improved corporate governance.
22 Other than charting corporate strategy, the Board of Directors is chiefly responsible for monitoring managerial performance and achieving an adequate return for shareholders, while preventing conflicts of interest and balancing competing demands on the corporation. Most governance guidelines and codes of best practice assert that the Board should explicitly assume responsibility for the stewardship of the corporation and emphasise that board responsibilities are distinct from management responsibilities.
23 Being primarily responsible for the workings of the Board, the chairman's role in securing good corporate governance is crucial. To provide some guidance, the Code sets out some examples of the role and responsibilities of the chairman. On the other hand, the Chief Executive Officer ("CEO"), representing management, shall have the general executive responsibility for the conduct of the business and affairs of the company. In carrying out his duties, the CEO should work closely with the Board to implement the corporate policies set by the Board and to realise a common vision for the company.
24 There are two views on the issue of the leadership structure. The first, as in the case of the UK and Australia, is a dual leadership structure, i.e. where there is a separate CEO and chairman on the Board. The argument is that with a clear division of responsibilities at the head of the company, the likelihood of an individual or a group of individuals having unfettered powers of decision will be reduced. It is noted that a separation is most effective if the chairman is independent. The second view is that such a structure is not necessary as it may hinder the decision-making process of the company. As a principle, the CGC is inclined towards the former view, so as to help ensure an appropriate balance of power and increased accountability. Such a separation (of the chairman and CEO) is important because it enhances the independence of the board in monitoring management. This is especially important in Singapore where the board tends to include a significant executive element, unlike most boards of the best-managed companies in the US, where almost all directors are independent. Moreover, as other mechanisms that discipline management (such as an active take-over market and shareholder activism) are less developed here, there is this increased need for a dual leadership structure.
25 Philosophically, there is also merit in requiring the chairman and CEO of the company to be unrelated, in order to avoid a significant concentration of power. However, the Committee notes that a company whose chairman and CEO are related to each other could be as well managed as one which does not. The Committee has decided that while it would not advocate one way or the other, it would require any such relationships to be disclosed.
26 The CGC subscribes to the view that Boards must have some degree of independence from Management in order to effectively fulfil their responsibilities. Accordingly, the Committee recommends that independent directors make up at least one-third of the Board. Such independent board members play an important role in areas where the interests of Management, the company and shareholders may diverge, such as executive remuneration, succession planning, changes of corporate control and the audit function. Furthermore, they are able to bring an objective view to the evaluation of the performance of the Board and Management.
27 The Committee also views the information on attendance of individual directors at Board and all specialised committee meetings as something basic but important, especially when there is an increasing trend for Boards to set up committees to perform specific functions delegated to them. Whilst attendance at Board meetings itself is not the sole or a conclusive indicator of the level of commitment or competence of a director, disclosure of such information will enable investors to come closer to making informed decisions as to whether to approve the re-election of the directors concerned.
28 The setting up of a Nominating Committee ("NC") is viewed by the CGC to be one of the most important elements of a good Board. It is intended to make the process of board appointments transparent and to assess the effectiveness of the Board as a whole and of individual directors.
29 While most codes do not establish performance criteria for Boards, a range of performance measurement tools is listed in the guidance notes. It is hoped this will not only allow flexibility on the part of companies to utilise measures that are most applicable to them, but also allow investors to compare the company with its industry peers. The Committee is of the view that ultimately, it should be left to the NC to recommend, and the Board to decide, the criteria upon which the Board's performance is to be evaluated.
30 The principal objectives of the CGC's recommendations on remuneration matters are to facilitate appropriateness, transparency and accountability on the issue of executive remuneration. These are premised on the fundamental principle of accountability to shareholders.
31 The Committee has recommended principles for executive remuneration, which hopes to place greater weightage on individual performance of executive directors and key managers, as well as corporate performance, as determinants of remuneration.
32 The recommendations relating to the setting out of processes in remuneration-setting, in particular, the institutionalisation of remuneration committees, seek to provide a greater degree of independence, impartiality and transparency in remuneration-setting.
33 The principles and guidance notes relating to the disclosure of corporate remuneration practices are intended to provide investors complete and meaningful information on the application of the Board's remuneration policies in the context of the performance of the company. These disclosure requirements again promote the fundamental tenets of accountability and fairness. Disclosures will provide shareholders, in an easily understood format, with the information they need to know on the quantum and components of remuneration, in conjunction with the company's performance and stated policies.
34 The Committee has carefully considered the extent of disclosure of individual directors' remuneration. On the one hand, the disclosure of individual directors' remuneration is in line with international best practice, and would be of benefit to shareholders, who have a right to know how directors are being compensated from corporate funds. However, this has to be balanced against the argument that such a practice might erode the personal privacy of directors of publicly listed companies (particularly in view of the fact that Singapore is a relatively small community), and might create inflationary pressure to ratchet directors' remuneration upwards. The Committee has therefore decided to recommend, at the minimum, that companies disclose the names of directors earning remuneration within bands of S$250,000. However, as best practice, companies are strongly encouraged to fully disclose the individual remuneration of directors. The Committee notes that the International Organisation of Securities Commissions ("IOSCO") has recommended, albeit in the context of prospectuses, that directors are required to disclose their individual remuneration.
35 There arises an issue as to whether these remuneration disclosure requirements should be extended to key executives of the company (over and above the directors). The practice in the US and Australia is to require the disclosure of the top-earning executives. After considering feedback received during the public consultation, the Committee decided to extend the disclosure of remuneration to at least the top 5 key executives of the company, so as to give investors a picture of how remuneration is distributed in the top tier of the company's Management
36 It is also hoped that corporations will utilise the use of longer-term incentive schemes, including shares and share option schemes. This is to align the interests of directors and executives with those of shareholders through holding a direct equity stake in the future of the company. Whilst the alignment of interest is important, shareholders also need to be adequately informed on such schemes and to understand the premise of such schemes, to ensure they are receiving due reward for the dilution that equity participation entails.
37 It should be stated that the guidelines are not meant to unduly stultify corporate policies on remuneration. Companies will still retain the flexibility to attract, retain and motivate employees in the interests of improved corporate performance.
Accountability and Audit
38 In the area of "Accountability and Audit", the respective roles of the Board and Management tend to overlap. In making its recommendations, the Committee seeks to draw attention to the roles and responsibilities of Management in the corporate governance process, as this will present the roles and responsibilities of the Board in better perspective. In this respect, the CGC stresses the accountability of Management to the Board, and the importance of providing all (both executive and nonexecutive) members of the Board with monthly management accounts. Also, the Committee recommends "quarterly reporting", so that minority shareholders have access to more timely information.
39 Firstly, the CGC emphasises the importance of the independence of the Audit Committee ("AC"). It subscribes to the view that the chairman of the AC should be an independent director and that ACs should establish a practice of meeting with the external auditors and the internal auditors, without the presence of the company's Management.
40 Secondly, the Committee emphasises the importance of the internal audit function being independent of the Management as the internal audit function is one of the principal means by which the AC is able to carry out its responsibilities effectively. There should be safeguards to protect the independence of the internal auditor. Accordingly, the CGC recommends that the internal auditor should report directly to the AC. In practice, the internal auditor's responsibilities often include activities other than internal audit. For the internal audit function to be effective, it is important that the internal auditor is not responsible for auditing its own activities.
41 Thirdly, the Committee emphasises the importance of Management's responsibility in maintaining a sound system of internal controls, and the Board's oversight responsibility to ensure that this is done. Whilst the Board collectively shares this responsibility, we would emphasise that it is the AC's specific role to ensure that an annual review of all material controls is conducted. While the Committee subscribes to the view that the Board should comment on the adequacy of the internal controls, it feels that the procedures for establishing whether the controls are adequate should be left to the market to develop.
42 The CGC subscribes to the view that the members of the AC should be appropriately qualified, as this will enhance the members' confidence and independence in the committee's dealing with the Management, as well as with both the external and the internal auditors. In this respect, the Committee recommends that at least two members should have accounting or related financial management expertise instead of one member as required by the NYSE. However, like the US requirement, the Committee emphasises that such qualification should be left to the Board's interpretation in its business judgement. The Committee feels that the requirement for at least two members to have the requisite expertise or experience would strengthen the objectivity of the AC's views and enhance the effectiveness of the AC when it liases with the external auditors.
43 The Committee also subscribes to the view that the internal audit function should be adequately staffed, and accorded appropriate standing and authority to enable the internal auditor to gain access to information and the senior members of the management team. This is important for the internal audit function of the company to operate effectively.
Communication with Shareholders
44 The principles and guidance notes in this section seek to encourage companies to engage in more effective communication with shareholders. The PWC survey (2000) showed that the manner and frequency with which information is disseminated to shareholders and/or analysts is clearly a key factor in any investment decision. In particular, 74 percent of the respondents wanted greater disclosure and transparency in the annual reports and financial statements.
45 The AGM is often the main opportunity for small shareholders to be fully briefed on the company's activities and to question the Management on both operational and governance matters. Shareholders have the right to participate in, and to be sufficiently informed on, major corporate developments. Companies should be encouraged to welcome the views and inputs of shareholders, and to address investors' concerns. Additionally, in disclosing information, companies should be as descriptive, detailed and forthcoming as possible, and avoid meaningless boiler-plate statements.
46 The Committee is mindful of the risk that close contact between companies and its shareholders might lead to different shareholders receiving different information. In particular, unpublished price-sensitive information may often be disclosed at analysts' briefings and private conversations with major investors. The Committee therefore subscribes to the view that all investors, whether institutional or retail, should be entitled to the same level of communication and disclosure. If such information can reasonably be expected to materially affect the market activity and the share price, the company in fact has an obligation under the SGX Listing Rules to disclose to the Exchange and shareholders as soon as reasonably practicable. Further, one of the OECD Principles of Corporate Governance states that processes and procedures for general shareholder meetings should allow for equitable treatment of all shareholders. Such an equitable and equal treatment should be extended to the issue of disclosure. The Committee felt that in the event where a company unintentionally or inadvertently discloses certain information to a select group, it should be required to make the same disclosure to the public. This could be done by way of a press release, an announcement on the company's website, or other comparable means.
47 The Committee notes that the default requirement in the Companies Act is that voting must be made by physical attendance, whether of the registered shareholder or his nominated proxy. Telephonic, electronic, or other modes of absentia voting is however allowed if it is specifically provided for in the company's articles of association. The Committee believes that it is important to encourage shareholders to play a more active role in voting at general meetings. This can be done by allowing absentia or by harnessing new electronic voting methods such as mail, email, fax, etc, if the shareholders are agreeable to such a process.
48 The Committee notes that the UK Combined Code requires the chairmen of the audit, remuneration and nomination committees to be available to answer questions at the AGM. The Committee feels that it is also important that the company's external auditors be present as well, to assist the directors in addressing any relevant queries by shareholders.
Future Evolution of the Code
49 Needless to say, the Code will continue to evolve over time, to maintain its relevance and applicability with the changing corporate landscape. The Committee therefore suggests that the Singapore Exchange, with inputs from interested parties such as bodies representing directors, investors, fund managers, accountants, etc, spearhead the initiative to co-ordinate future reviews or updates of the Code. Such an effort to review the Code could also be conducted by the panel recommended by the Disclosure and Accounting Standards Committee to undertake the task of reviewing and enhancing reporting and disclosure standards in Singapore. We hope to see the continued involvement of industry representatives in these future reviews.
50 The Committee is pleased to set forth its recommendations.