A/P Mak Yuen Teen Co-Director, CGFRC, NUS Business School Deputy Chairman, Corporate Governance...

A/P Mak Yuen TeenA/P Mak Yuen Teen

Co-Director, CGFRC, NUS Business SchoolCo-Director, CGFRC, NUS Business School

Deputy Chairman, Corporate Governance Deputy Chairman, Corporate Governance Committee, ICPASCommittee, ICPAS

Corporate Governance: Corporate Governance: Recent Developments Recent Developments and Regional Practicesand Regional Practices

• Recent international CG codes and rulesRecent international CG codes and rules

• Singapore Code versus international Singapore Code versus international benchmarksbenchmarks

• CGFRC-S&P studies of regional CG CGFRC-S&P studies of regional CG practices and disclosures (large companies)practices and disclosures (large companies)

• CGFRC-JLT survey of corporate governance CGFRC-JLT survey of corporate governance and directors’ and officers’ liability issuesand directors’ and officers’ liability issues

OUTLINEOUTLINE

•U.K. –New Combined Code (2003), Directors’ U.K. –New Combined Code (2003), Directors’ Remuneration Report Regulations (2002)Remuneration Report Regulations (2002)

• U.S. - Sarbanes-Oxley Act (2002), SEC and NYSE U.S. - Sarbanes-Oxley Act (2002), SEC and NYSE Rules (2002-2003)Rules (2002-2003)

•Australia - ASX Principles of Good Corporate Australia - ASX Principles of Good Corporate Governance and Best Practice Recommendations Governance and Best Practice Recommendations (2003); CLERP 9 Reforms (2002/3)(2003); CLERP 9 Reforms (2002/3)

• H.K. – HKEx Listing Rule Amendments; Draft Code H.K. – HKEx Listing Rule Amendments; Draft Code on Corporate Governance Practices and Corporate on Corporate Governance Practices and Corporate Governance Report (2004)Governance Report (2004)

Recent International DevelopmentsRecent International Developments

Non-prescriptive Balanced PrescriptiveNon-prescriptive Balanced Prescriptive

U.S. U.S.

U.K.U.K.

AustraliaAustralia

SingaporeSingapore

Hong KongHong Kong

Major International DevelopmentsMajor International Developments

• Board compositionBoard composition

– Singapore: at least one-third independent Singapore: at least one-third independent directors directors

–U.S., U.K. and Australia:U.S., U.K. and Australia: At least At least half/majority of independent directorshalf/majority of independent directors

–H.K.: At least 3 independent directors; H.K.: At least 3 independent directors; recommended best practice, one-thirdrecommended best practice, one-third

Board MattersBoard Matters

• Definition of independenceDefinition of independence

– Singapore: independence from Singapore: independence from managementmanagement

–U.S.: independence from managementU.S.: independence from management

– U.K., Australia and H.K.:U.K., Australia and H.K.: independence independence from management and significant from management and significant shareholdersshareholders



•Board leadershipBoard leadership

–Singapore: CEO and Chairman should be separate Singapore: CEO and Chairman should be separate (and, if related, should be disclosed)(and, if related, should be disclosed)

–U.K., Australia and H.K.: CEO and Chairman U.K., Australia and H.K.: CEO and Chairman should be separateshould be separate

–U.K.: Chairman should be independent at the time of U.K.: Chairman should be independent at the time of appointmentappointment

–U.K. (Australia): Appointment of a senior or lead U.K. (Australia): Appointment of a senior or lead independent director (if Chairman is not independent)independent director (if Chairman is not independent)

– U.K. and Australia: The CEO should not go on to U.K. and Australia: The CEO should not go on to become Chairman of the same companybecome Chairman of the same company

•Nomination committee (NC) compositionNomination committee (NC) composition

–Singapore, U.K., Australia and H.K.: Singapore, U.K., Australia and H.K.: majority and NC Chair independentmajority and NC Chair independent

–U.S.: All NC members independentU.S.: All NC members independent

– U.K.:U.K.: The Chairman of the board should not The Chairman of the board should not chair the NC “when it is dealing with the chair the NC “when it is dealing with the appointment of a successor to the appointment of a successor to the chairmanship.”chairmanship.”


•Nomination processNomination process

– Singapore: No specific requirement to Singapore: No specific requirement to disclose nomination processdisclose nomination process

–U.S., U.K. and Australia: process for U.S., U.K. and Australia: process for selection of directors should be disclosedselection of directors should be disclosed

–U.K.: explanation if neither external search U.K.: explanation if neither external search consultancy nor open advertising is usedconsultancy nor open advertising is used



•Tenure of directorsTenure of directors

– Singapore: re-nomination and re-election at Singapore: re-nomination and re-election at regular intervals but no limit on tenureregular intervals but no limit on tenure

–U.K., Australia and H.K.: long tenure can affect U.K., Australia and H.K.: long tenure can affect independenceindependence

–U.K.: non-executive directors who serve more U.K.: non-executive directors who serve more than nine years should be subject to annual re-than nine years should be subject to annual re-election by shareholders and requires explanation election by shareholders and requires explanation from the board for such directors to be deemed to from the board for such directors to be deemed to be independent be independent

Board MattersBoard Matters•Appointment of directorsAppointment of directors

–Singapore: no provision on formal Singapore: no provision on formal appointment letter appointment letter

–U.K. and Australia: formal appointment U.K. and Australia: formal appointment letter setting out terms and conditionsletter setting out terms and conditions


•Director orientation and on-going Director orientation and on-going trainingtraining

–Singapore: appropriate training and orientation on Singapore: appropriate training and orientation on first appointment, and ongoing trainingfirst appointment, and ongoing training

–also emphasised in U.S., U.K., Australia and H.K. also emphasised in U.S., U.K., Australia and H.K.

–U.K.: Chairman of the board responsible; Australia: U.K.: Chairman of the board responsible; Australia: NC responsibleNC responsible

– U.K. and Australia codes include guidance on topics U.K. and Australia codes include guidance on topics to be addressed in induction programmes for new to be addressed in induction programmes for new directors directors

•Limits on directorshipsLimits on directorships

– All countries require disclosure of All countries require disclosure of current and past directorships current and past directorships

–U.K.:U.K.: “No individual should be appointed “No individual should be appointed to a second chairmanship of a FTSE 100 to a second chairmanship of a FTSE 100 company”company”

– U.K.: A full time executive director should U.K.: A full time executive director should not take on more than one non-executive not take on more than one non-executive directorship or chairmanship in a FTSE 100 directorship or chairmanship in a FTSE 100 company. company.


• Performance evaluationPerformance evaluation

–Singapore: board and individual director Singapore: board and individual director evaluation evaluation

–UK: evaluation of board, board committees, UK: evaluation of board, board committees, individual directors, Chairmanindividual directors, Chairman

–Australia: evaluation of board, board committees, Australia: evaluation of board, board committees, individual directors and key executivesindividual directors and key executives

–U.S.: evaluation of board and board committeesU.S.: evaluation of board and board committees

–H.K.: to be consideredH.K.: to be considered


• Remuneration committee (RC)Remuneration committee (RC)

– Singapore and Australia: majority of independent Singapore and Australia: majority of independent directors with independent Chair directors with independent Chair

– H.K: majority independentH.K: majority independent

– U.K. and U.S.:U.K. and U.S.:

• RC should include only independent non-executive directorsRC should include only independent non-executive directors

• RC should be responsible for appointing remuneration RC should be responsible for appointing remuneration consultantsconsultants

RemunerationRemuneration

• Use of share options for NEDsUse of share options for NEDs– Singapore: endorsement of use of share options Singapore: endorsement of use of share options for directors for directors

–U.K. and Australia: NEDs should generally not be U.K. and Australia: NEDs should generally not be awarded share options. awarded share options.

–U.K.: in exceptional cases where share options are U.K.: in exceptional cases where share options are to be given, shareholder approval is required, any to be given, shareholder approval is required, any shares acquired should be held until at least one shares acquired should be held until at least one year after the NED leaves the board, and holding of year after the NED leaves the board, and holding of share options could be relevant in determining share options could be relevant in determining whether a director is independent.whether a director is independent.


• Disclosure of remuneration - Singapore:Disclosure of remuneration - Singapore:–Remuneration of directors and at least top 5 Remuneration of directors and at least top 5 key executives (who are not directors), including key executives (who are not directors), including names, within bands of $250,000names, within bands of $250,000

– Breakdown in percentage terms of each Breakdown in percentage terms of each director’s remuneration into componentsdirector’s remuneration into components

– Disclosure of remuneration details of related Disclosure of remuneration details of related employees earning more than $150,000 on no-employees earning more than $150,000 on no-name basis name basis


• Disclosure of remuneration - U.K.:Disclosure of remuneration - U.K.:–Directors remuneration report must include:Directors remuneration report must include:

• A forward looking remuneration statementA forward looking remuneration statement• A performance graph of the company’s shareholder return for A performance graph of the company’s shareholder return for the past 5 years against a market indexthe past 5 years against a market index• Details of RC members and external remuneration consultantsDetails of RC members and external remuneration consultants• Details of directors’ service contractsDetails of directors’ service contracts• Detailed disclosure of individual remuneration (audited) for Detailed disclosure of individual remuneration (audited) for each director each director

– Remuneration report to be approved by the Remuneration report to be approved by the board and subject to non-binding resolution by board and subject to non-binding resolution by shareholdersshareholders


• Disclosure of remuneration - U.S.:Disclosure of remuneration - U.S.:–Detailed disclosure of compensation of directors and Detailed disclosure of compensation of directors and top 5 highest-paid executives in the company in exact top 5 highest-paid executives in the company in exact amount.amount.

•Disclosure of remuneration – Australia:Disclosure of remuneration – Australia:–annual disclosure of details of nature and amount of annual disclosure of details of nature and amount of each element of the fee and salary of each individual each element of the fee and salary of each individual director and each of the five highest-paid officers of the director and each of the five highest-paid officers of the companycompany


• Disclosure of remuneration – H.K.:Disclosure of remuneration – H.K.:–Under Listing Rules, directors’ fees and any Under Listing Rules, directors’ fees and any other reimbursement or emolument payable to a other reimbursement or emolument payable to a director must be disclosed on an individual and director must be disclosed on an individual and named basisnamed basis


• Audit committee (AC)Audit committee (AC)–Singapore: All non-executive, majority independent; Singapore: All non-executive, majority independent; independent Chair; at least two members should have independent Chair; at least two members should have accounting or related financial management expertise or accounting or related financial management expertise or experienceexperience–U.K. and U.S.: AC members should all be independentU.K. and U.S.: AC members should all be independent– U.K.: at least one member have recent and relevant U.K.: at least one member have recent and relevant financial experiencefinancial experience– U.S.: all should be financially literate, with at least one U.S.: all should be financially literate, with at least one “audit committee financial expert” as defined by SEC “audit committee financial expert” as defined by SEC rules, with disclosure if there is no such expertrules, with disclosure if there is no such expert

Audit and AccountabilityAudit and Accountability

• Audit committee (AC)Audit committee (AC)–Australia: all non-executive, majority independent; Australia: all non-executive, majority independent; independent Chair other than board Chairman; all independent Chair other than board Chairman; all financially literate with one with financial expertisefinancially literate with one with financial expertise– H.K.: all non-executive, majority independent; H.K.: all non-executive, majority independent; independent Chair; one independent director with independent Chair; one independent director with appropriate professional qualifications or accounting or appropriate professional qualifications or accounting or related financial management expertise (Listing Rule)related financial management expertise (Listing Rule)


• Internal auditInternal audit–Singapore: internal audit function should be establishedSingapore: internal audit function should be established

–U.S.: mandatory under new NYSE rules, but not under U.S.: mandatory under new NYSE rules, but not under NASDAQ rules NASDAQ rules

–H.K. (U.K.): companies without internal audit should H.K. (U.K.): companies without internal audit should annually consider whether there is need for an internal annually consider whether there is need for an internal audit function (and explain the absence of such a function).audit function (and explain the absence of such a function).

–Australia: “a company, especially a substantial company, Australia: “a company, especially a substantial company, is encouraged to have an internal audit function”is encouraged to have an internal audit function”


• Certification of financial reportsCertification of financial reports

–U.S.: the Sarbanes-Oxley Act requires both the CEO and CFO to certify the companies’ quarterly and U.S.: the Sarbanes-Oxley Act requires both the CEO and CFO to certify the companies’ quarterly and annual financial reports.annual financial reports.

–Australia: the CEO and CFO should be required “to state in writing to the board that the company’s Australia: the CEO and CFO should be required “to state in writing to the board that the company’s financial reports present a true and fair view” of the company’s financial conditions. There is a proposal financial reports present a true and fair view” of the company’s financial conditions. There is a proposal to amend Corporations Act to require the CEO and CFO to sign off the accounts to the Boardto amend Corporations Act to require the CEO and CFO to sign off the accounts to the Board


• U.K. Code encourages contact between major shareholders and Chairman/NEDsU.K. Code encourages contact between major shareholders and Chairman/NEDs•Singapore, U.K. and H.K.: chairmen of AC, NC and RC should attend AGMSingapore, U.K. and H.K.: chairmen of AC, NC and RC should attend AGM•Singapore and Australia: external auditor should attend AGM (proposal in Singapore and Australia: external auditor should attend AGM (proposal in Australia to make this a legal requirement)Australia to make this a legal requirement)

Communication with ShareholdersCommunication with Shareholders

• Singapore: no provisions relating to role of institutional shareholdersSingapore: no provisions relating to role of institutional shareholders

•U.K.: institutional shareholders should enter into dialogue with companies, U.K.: institutional shareholders should enter into dialogue with companies, carefully evaluate explanations for departures from Code, and make considered carefully evaluate explanations for departures from Code, and make considered use of their votes use of their votes

Role of Institutional ShareholdersRole of Institutional Shareholders

•

• Code of conduct and ethics/WhistleblowingCode of conduct and ethics/Whistleblowing–Singapore: no provisions in the CodeSingapore: no provisions in the Code

–Australia: code of conduct, which enables employees to whistleblowAustralia: code of conduct, which enables employees to whistleblow

–U.K.: AC should review arrangements by which staff may confidentially raise concerns about possible U.K.: AC should review arrangements by which staff may confidentially raise concerns about possible improprieties in financial reporting and other mattersimproprieties in financial reporting and other matters

– U.S.: code of business conduct and ethics with disclosure of waivers; whistleblowing provisions in Sarbanes-OxleyU.S.: code of business conduct and ethics with disclosure of waivers; whistleblowing provisions in Sarbanes-Oxley

Other IssuesOther Issues

Regional CG Practices: CGFRC-S&P Regional CG Practices: CGFRC-S&P StudiesStudies

• Countries covered: Singapore, Malaysia, Thailand and Indonesia

• Top 50 companies by market capitalisation or all companies included in country’s major stock market index.

• The latest annual reports published by 2004 used.

• Corporate governance disclosure scorecard developed by Standard & Poor’s

• The scorecard items reflect best practices embodied in international corporate governance codes

Regional CG Practices: CGFRC-Regional CG Practices: CGFRC-S&P StudiesS&P Studies

Item Singapore Malaysia Thailand Indonesia*

Sample size 45 50 50 42

Maximum score 119/140 94/140 75/140 54/160

Minimum score 16/140 44/140 4/140 3/160

Mean 80.58 64.92 37.56 23.05

Standard deviation 28.57 11.85

16.60

11.83

Median 92.00 64.00 35.00 21.50


Board Size

0

5

10

15

20

25

Singapore Malaysia Thailand Indonesia

Country

Num

ber

of d

irec

tors

Minimum

Average

Maximum


Note that definition of independent directors differs across countries

Board Composition

0%10%20%30%40%50%60%70%

Notdisclosed

1/3 or less More than1/3 to 1/2

More than1/2 to 2/3

More than2/3

% of independent directors

% o

f com

pani

es Singapore

Malaysia

Thailand

Indonesia


CEO-Chairman Separation

0%

20%

40%

60%

80%

100%

Singapore Malaysia Thailand

Country

% o

f c

om

pa

nie

s

Separate Persons*

Related Persons

Same Person

* May or may not be related


Board Meeting Frequency

0%10%20%30%40%50%60%70%80%

No. of board meetings

% o

f com

pani

es

Singapore

Malaysia

Thailand

Indonesia


Attendance at Board Meetings

0%20%40%60%80%

100%

% of attendance

% o

f com

pani

es

Singapore

Malaysia

Thailand

Indonesia


Nominating Committee Establishment and Membership Disclosure

0%

20%

40%

60%

80%

100%


Country

% o

f co

mp

anie

s

Presence of NC

Disclosure of members


NC Composition

0%

20%

40%

60%

80%

100%


Country

% o

f com

pani

es All members independent

Majority independent

Independent Chairman


Board Appraisal

0%

20%

40%

60%

80%

100%

120%


Country

% o

f com

pani

es Not Disclosed

Disclosed

Process disclosed

Criteria disclosed


Individual Director Appraisal

0%

20%

40%

60%

80%

100%

120%


Country

% o

f com

pani

es Not Disclosed

Disclosed

Process disclosed

Criteria disclosed


Remuneration Committee Establishment and Membership Disclosure

0%

20%

40%

60%

80%

100%


Country

% o

f com

pani

es

Presence of RC

Disclosure of members


RC Composition

0%

10%

20%

30%

40%

50%

60%


Country

% o

f com

pani

es

All members independent



Disclosure of Director Remuneration

Country


Executive Directors

Exact Amount 20% 14% 18% 0%

Bands 67% 80% 0% 0%

Non-executive Directors


Bands 58% 78% 0% 0%

Top Company Executives


Bands 67% 0% 0% 0%


AC Composition

0%

20%

40%

60%

80%

100%

120%


Country

% o

f com

pani

es

All members independent


Independent Chairman


AC Meeting Frequency

0%20%40%60%80%

100%

Not D

isclo

sed

2 tim

es o

r les

s

3 to

4 tim

es

5 to

6 tim

es

7 to

8 tim

es

9 tim

es o

r mor

e

No. of times

% o

f c

om

pa

nie

s

Singapore

Malaysia

Thailand

Indonesia

• A survey: to assess the awareness of corporate governance and D&O liability issues in Singapore

- Questionnaire sent to 472 companies listed on SGX

- Response rate of 22% (105 companies)

- 14 respondents did not disclose their identity

CGFRC-JLT Corporate Governance CGFRC-JLT Corporate Governance and D&O Liability Survey and D&O Liability Survey

(Singapore)(Singapore)

Perceptions of Corporate GovernancePerceptions of Corporate Governance

• Some key findings: –56% agreed that the standard of corporate governance in Singapore is comparable to those of the USA and UK while only 10% disagreed

–92% agreed that the standard of corporate governance in Singapore is high among Asian countries

–However, 66% agreed that there is substantial diversity in the standards of corporate governance amongst companies in Singapore and only 9% disagreed


–84% agreed that the companies could be doing more to improve corporate governance and only 2% disagreed

–About equal percentage of respondents agreed and disagreed with the view that minority shareholders in family-controlled companies are equitably treated by controlling shareholders

–60% agreed that minority shareholders’ interests are adequately protected and only 16% disagreed

–63% agreed that market manipulation/malpractices is not a significant problem and only 11% disagreed


–48% agreed that good corporate governance has a beneficial effect on a company’s financial performance (e.g., higher share price or lower cost of capital) and 9% disagreed

–over half the companies agreed that majority of directors on the board should be independent though nearly 30% disagreed

–almost all respondents agreed that independent directors should be independent of management as well as controlling shareholders


–nearly three-quarters of the respondents agreed that the audit committee should comprise entirely of independent directors whereas only half the respondents held the same views for remuneration committee and the nominating committee

–nearly 20% of the respondents disagreed that the CEO and Chairman positions should be held by different persons while over a half agreed with the view that separate individuals should hold these positions


–only a third of the companies agreed that the Chairman’s position should be held by an independent director and another third disagreed

–about three-quarters of the respondents also felt that the Code of Corporate Governance should have different guidelines for companies of different sizes and only 12% disagreed with this view

–more than 80% agreed that there should be a limit on number of directorships

• All companies, except one, reported taking some measures to increase their standard of corporate governance.

Measures to Improve Corporate Measures to Improve Corporate GovernanceGovernance

93%

92%

82%

75%

63%

80%

72%

20%

65%

44%

Improvetransparency

Establish checksand balances

Improveremuneration

disclosure

Strenghten role ofindependent

directors

Increase oversightby independentprofessionals

Hongkong

Singapore

Data for Hong Kong (used in this entire presentation) is obtained from the “Corporate Governance and Directors’ & Officers’ Liability Survey of Listed Companies in Hong Kong”, 2003 commissioned by Jardine Lloyd Thompson Limited and conducted by Policy 21 Ltd., The University of Hong Kong

D & O LiabilityD & O Liability• Inadequate or inaccurate disclosure of information and accounting and

other fraud were the top two reasons for D&O liability claims.

Reasons for D&O liability claimsInadequate/inaccurate disclosure 73%

Accounting & other fraud 69%

Conflict of interest 67%

Mismanagement leading to poor financial performance 60%

Interested party transactions 57%

Personal trading in shares of company 54%

Assessment of Risk

11% 12%

35% 36%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Singapore Hong Kong

Today In Future

D & O LiabilityD & O Liability

• Many see an increasing threat of claims against directors and officers

D & O LiabilityD & O Liability• Over three-quarters of the respondents provide insurance cover

against D&O liability claims, however, high coverage amounts are very rare.

• In the Hong Kong survey, 41.5% of the companies did not have D&O liability insurance while in Singapore, the figure is 21%.

D&O Insurance Coverage (S$)

<10m40%

10m-30m35%

30m-50m2%

75m-100m1%

>150m1%

No Insurance21%

Thank You…Thank You…

Email: [email protected]; website: www.cgfrc.nus.edu.sg

A/P Mak Yuen Teen Co-Director, CGFRC, NUS Business School Deputy Chairman, Corporate Governance...

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