Transcript Recommending a Strategy

THE OUTLOOK FOR
CORPORATE GOVERNANCE
A/P Mak Yuen Teen
Director
Corporate Governance and Financial
Reporting Centre
IIA Singapore 30th Anniversary Conference 2006, 28-29
September, 2006
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Outline
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What have we achieved?
What are current problem areas?
What more needs to be done?
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by boards
by regulators
by investors
by accountants
What Have We Achieved?
A fair bit….
International Accolades
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Doing Business 2007 (World Bank)
Singapore ranked No. 2 globally in protection of
investors’ interests
 Singapore included among the countries that protect
investors the most in terms of disclosure, extent of
director liability and ease of shareholder lawsuits
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CG Watch 2005 (CLSA-ACGA)
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Singapore ranked no. 1 among 10 countries (but gap
between Singapore and Hong Kong has closed to 1
point, from 8 points previously)
Enforcement of Rules
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Singapore has taken prompt enforcement
actions with regards to recent corporate
scandals (CAO, Citiraya, ACCS, Informatics,
Auston) and insider trading violations
Time taken between public disclosure of
scandal to charges ranged from 5 months to
19 months. The convictions and sentencing
occurred 1 day to 10 months after the
charges were first filed.
Our Enforcement Scorecard – 2005-2006
Party charged
Number
Company
Chairman
Non-executive directors
Independent directors
1 (Auston)
2 (Informatics, CAO)
2 (CAO)
0
CEO
CFO
Other employees
Others (suppliers, etc.)
4 (1 missing)
3 (CAO, Citiraya, ACCS)
17
10 + 11 for insider trading
Mak, Y.T., Lan, L.L., Buang, A.B., Implementation and Enforcement of Rules in
Singapore and the Case of China Aviation Oil, OECD Asian Corporate Governance
Roundtable, September 2006.
Singapore CG Awards 2006
Corporate Governance Practice – Board Matters
2006(%)
Do independent directors constitute more than 1/3 of the board?
91%
Do independent directors constitute more than 1/2 of the board?
19%
Are the chairman and CEO positions held by separate persons?
62%
Are the chairman and CEO positions held by unrelated persons?
38%
Is attendance of individual directors at board meetings disclosed?
90%
Is the frequency of board meetings disclosed?
95%
Did the board meet more than 6 times in the year?
12%
Are all directors attending at least 80% of the board meetings?
80%
Are the type of material transactions that must be approved by the board
disclosed?
90%
Singapore CG Awards 2006
Corporate Governance Practice – Board Matters
2006(%)
Does the company provide training (either in-house or externally) for
all of its directors?
7%
Does the company provide ongoing training (in-house or externally)
on issues beyond basic director duties and liabilities?
44%
Is there an induction/orientation program for all new directors?
45%
Are details of previous experience, educational qualificatons and all
other listed directorships of each director disclosed?
17%
Do directors have separate and independent access to company’s
senior management?
83%
Singapore CG Awards 2006
Corporate Governance Practice – Nomination Matters
2006(%)
Does the company have a nominating committee?
92%
Is the majority of nominating committee independent?
86%
Is the chairman of the nominating committee independent?
86%
Has the nominating committee reviewed, at least annually, whether or not a
director is independent?
26%
Has the nominating committee reviewed the adequacy of time spent by
directors on the affairs of each company?
9%
Was appraisal of board performance conducted?
26%
Is disclosure made of the process of board evaluation? (e.g. conducted by
external party, conducted by NC, conducted by board etc.)
62%
Singapore CG Awards 2006
Corporate Governance Practice – Nomination Matters
2006(%)
Does director remuneration include long term incentives? E.g. bonuses
payable after 12 months and/or share option with a vesting period > 12
months
31%
Are criteria used for evaluating board performance disclosed? e.g.
Company’s share price performance over past years; Return on
assets; Return on equity; Return on investment; Economic value
added; Profitability on capital employed
28%
Is individual performance of board members evaluated?
17%
Is disclosure made of the process of director evaluation? (e.g. conducted
by external party, conducted by NC, by board etc.)
49%
Are criteria used for individual director performance evaluation disclosed?
24%
Singapore CG Awards 2006
Corporate Governance Practice – Remuneration Matters
2006(%)
Does the company have a remuneration committee?
94%
Are all members of the RC independent directors?
17%
Is the remuneration committee chaired by an independent nonexecutive director?
86%
Is disclosure made of the remuneration committee’s processes (e.g.
external compensation specialists hired) to ascertain industry practices
and salary levels for pay and employment conditions?
18%
Is executive director compensation linked to industry, company and/or
individual performance?
57%
Are the fees of non-executive directors linked to their level of
contribution and responsibilities, and time spent and effort?
46%
Singapore CG Awards 2006
Corporate Governance Practice – Remuneration Matters
2006(%)
Is disclosure made to shareholders of remuneration of executive
directors in exact amount?
6%
Is disclosure made to shareholders of remuneration of non-executive
directors in exact amount?
7%
Is disclosure made to shareholders of remuneration of top 5
executives who are not directors in exact amount?
2%
Is disclosure made of components of remuneration analysed by
salaries, variable bonuses, options and long-term incentives?
75%
Singapore CG Awards 2006
Corporate Governance Practice – Audit Matters
2006(%)
Is the entire audit committee independent?
49%
Is the chairman of the audit committee independent?
95%
Do at least 2 members of the audit committee have accounting experience
or related financial management expertise or experience
63%
Has the audit committee met with external auditors at least once annually in
the absence of company management?
30%
Has the audit committee reviewed scope, results and effectiveness of
audits?
44%
Has the audit committee met with internal auditors at least annually?
24%
Has the audit committee reviewed the independence of external auditors?
82%
Singapore CG Awards 2006
Corporate Governance Practice – Audit Matters
2006(%)
Was an annual review conducted of company’s internal controls and risk
management?
64%
Does the annual report include a statement by the board on adequacy of
internal controls, including financial, operational and compliance controls
and risk management policies and systems established by management?
32%
Does the internal auditor report primarily to the chairman of the audit
committee?
46%
Does the internal auditor meet standards set by recognised professional
bodies (e.g. Institute of Internal Auditors)?
25%
Has the audit committee reviewed adequacy of internal audit function?
22%
What are the Current Problem
Areas?
Observations from the Singapore CG
Awards and Other Reports
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Lack of regulatory or market enforcement of
“comply or explain” has led to following problems
in corporate governance reporting:
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false disclosures
non-compliance with comply or explain
partial compliance with no explanations
boilerplate disclosures
Tendency to follow the letter rather than the spirit,
and to act legally but not necessarily ethically
Observations from the Singapore CG
Awards and Other Reports
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Tenure of independent directors
Board interlocks
Multiple directorships
Excessive stock option grants for independent
directors/
Lack of vesting schedule for stock options
Observations from the Singapore CG
Awards and Other Reports
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Expertise of the Audit Committee
Threats to auditor independence
Risk disclosures
Board’s oversight over internal controls and risk
management
Openness to the media and retail investors
Lack of adequate checks and balances at the top
for many SESDAQ companies
Other Observations
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Some of our laws are generally difficult to enforce,
e.g.,
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S157 on duties of directors (only CEO of CAO charged
with this in 5 corporate scandals)
S4 on shadow/de facto directors
S199 of SFA?
Other Observations
False or misleading statements, etc.
199. No person shall make a statement, or disseminate information,
that is false or misleading in a material particular and is likely —
(a) to induce other persons to subscribe for securities;
(b) to induce the sale or purchase of securities by other persons; or
(c) to have the effect of raising, lowering, maintaining or stabilising
the market price of securities,
if, when he makes the statement or disseminates the information —
(i) he does not care whether the statement or information is true or false;
or
(ii) he knows or ought reasonably to have known that the statement or
information is false or misleading in a material particular.
Other Observations
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Protection of minority shareholder rights
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Difficulty/costs faced by minority shareholders of listed
companies in taking derivative actions
Costs of class action to seek redress for losses suffered
by minority shareholders
Expropriation of minority investors by controlling
shareholders in practice remain a concern
What More Needs to Be Done?
What More Needs to be Done – Boards
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Focus on the 3 C’s in appointing directors/CEO –
character, commitment and competence
Pay independent directors adequately and in appropriate
ways (discontinue stock options)
Independent directors need to commit more time to
understand the business and be more involved in strategy
(over-specialisation of independent directors?)
“Independent” directors need to act more independently
and be more sensitive to minority shareholders’ interests
Independent directors need to pay more attention to the
quality/independence of the internal/external audit
What More Needs to be Done - Regulators
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Improve enforcement of rules, including listing rules
Hold directors, including independent directors,
accountable for gross negligence (consider different
types of sanctions, like fines and disqualifications)
Improve rights of minority shareholders with respect to
appointment of independent directors and ability to take
civil action
Put pressure on institutional investors to become more
active
What More Needs to be Done –Investors
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Apply pressure on companies to follow the comply or
explain approach
Challenge disclosures made by companies about their
corporate governance
Ask more intelligent questions, especially about
director appointments (tenure, interlocks, multiple
directorships), remuneration policies, strategies
Fund managers need to be more visible at AGM and
engage companies more
Local and foreign institutional investors should
collaborate to engage companies
What More Needs to be Done – Accountants
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External auditors need to be more independent of
companies and management
Address issue of consistency of quality of audit
(including within the same accounting firm)
Internal auditors need to ensure that their work is up to
standard (internal and external reviews of their work)
The Outlook for Corporate
Governance?
Thank You!
Q&A
Presentation can be downloaded
from www.cgfrc.nus.edu.sg
CGFRC Conference on “Reforming
Governance in the Non-Profit Sector: Beyond
Rules and Regulations”, 2 November 2006
[Riverfront Furama Hotel, only $50!]