Transcript Slide 1
Mak Yuen Teen
SIAS Corporate Governance Conference, 8 October 2008
Corporate governance refers to having the
right people, structure and processes to
direct and manage the company, in order to
enhance its long-term value, through
enhancing performance, accountability and
risk management. It is about empowering
management, while ensuring that there is
adequate oversight and accountability.
Having the right people is as (more?)
important as structure and processes
Robust risk management is critical to good
corporate governance (and may be
undermined by design of “pay for
performance” schemes)
The board should not micro-manage
To improve substance, the board must:
◦ believe in accountability
◦ take responsibility for governance
◦ seek continuous improvements
◦ incorporate good governance principles into
everything it does
Hold directors and senior management to the
highest ethical standards
◦ having a code of conduct or ethics for
directors and senior management is a good
start
◦ enforcing ethical standards on directors and
senior management is critical
Rigorous processes should be followed in:
◦ recruiting the right directors, which involves
assessing current mix of skills and
backgrounds of directors against the desired
mix, and having a robust process for
identifying and selecting candidates
diversity in competencies and backgrounds is
valuable provided it’s not “tokenism” (e.g.,
specialists/generalists, CEOs/non-CEOs,
local/foreign directors, gender, races,
private/public/non-profit, etc.)
Pros:
Cons
◦ knowledge of overseas market in which
company has a listing or significant business
◦ not part of “old boys’ network” so better able
to express dissenting views
◦ influence the board to adopt international
good practices
◦ lack of knowledge of local laws and practices
◦ difficulty in actively contributing to board and
committee work
◦ difficulty in paying them adequate fees or may
lead to fee escalation for entire board if no
policy on differential fees for foreign directors
Rigorous processes should be followed in:
◦ inducting and developing directors
◦ assessing independence of independent
directors to ensure that they are independent
in substance, continue to be so, and likely to
be perceived to be so
◦ assessing board and director performance to
ensure that the board and individual directors
are in fact adding value
In the UK, the Institute of Chartered
Secretaries and Administrators (ICSA) has
published a guidance note on “Induction of
Directors” (http://www.icsa.org.uk), divided
into:
◦ essential information to be provided
immediately (directors’ duties, company’s
business, board issues);
◦ additional material to be provided within the
first few months
◦ additional information which the company
secretary might consider making the director
aware of
“Principles-based” approach to assessment of
independence by the NC:
◦ determines whether the director is caught by one
of the 4 relationships in guideline 2.1
◦ considers whether there is any other relationship
or factor which may influence the director’s ability
to act independently (e.g., long tenure, interlocks)
◦ considers the director’s actual behaviour
◦ carefully explains why director is deemed
independent where threats to independence exist
A typical board assessment questionnaire
may cover:
board structure, roles and responsibilities
board meeting processes
board culture and relationships
board’s access to information and
management
◦ board’s involvement in strategy and planning
◦ board’s involvement in monitoring
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Committee performance should also be
assessed
Some key issues:
Feedback from management
Feedback from key shareholders
Use of external party
Simple annual, plus more comprehensive less
regular, evaluations
◦ Quantitative vs qualitative
◦ Benchmarking to other boards
◦ Using the results of assessment
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Board and management must have a good
working relationship but without becoming
too close
Board and management must have clear
understanding of their respective roles and
responsibilities
Board should delegate clearly, have clear
reserved powers and supervise its delegation
Supervising delegation requires the board to
be pro-active in asking questions and
seeking information
Certain reserved powers can be delegated to
board committees but this should be explicit
Beware of board committees over-reaching
into management
Approval of vision, mission, values statement,
code of ethics and strategic plan
Recommendation to appoint/change auditors
Recommendation on the remuneration of
auditors
Approval of auditors’ engagement letter
Review of auditors’ recommendations and
observations
Approval of all circulars and other documents,
including those required by the stock exchange
to be sent to shareholders
Approval of press releases on matters decided
by the Board
Approval/review of interested party transactions
Approval of interim and final accounts and
reports
Approval of interim dividends and
recommendation of a final dividend
Approval of all significant changes in
accounting policies and practices
Approval of budget
Approval of all changes to the organisation of
senior management
Approval of CEO remuneration and policy
Approval of individual items of expenditure in
excess of a stated amount
An internal control system should include at
least the following:
◦ explicit assignment of responsibilities for
internal control
◦ procedures for assessing the effectiveness of
internal controls
◦ reporting of significant risk and internal
control matters to the Board and CEO
◦ whistleblowing arrangements
According to the ASX recommendations, a sound
risk management system should include:
◦ policies on risk oversight and management, which
clearly describe roles and accountabilities
◦ policies which cover oversight; risk profile; risk
management; compliance and control; and
assessment of effectiveness
◦ the board’s oversight of
establishment and
implementation of the risk management system,
and review of its effectiveness at least annually
◦ risk profile should cover material financial and
non-financial risks, and should be regularly
reviewed and updated
◦ management’s responsibility for establishing
and implementing a system for identifying,
assessing, monitoring and managing material
risk throughout the organisation
◦ means of analysing the effectiveness of its risk
management system and effectiveness of
implementation
•There is often an over-reliance on cash
bonuses based on annual profits and stock
options to “pay for performance”
•Such “pay for performance” schemes
encourage senior executives to take on
more risk without bearing the full
consequences (they have asymmetric
payoffs)
•Relative TSR also does not properly account
for risk
Yr 1
profit
Yr 1
Yr 2
bonus profit
(5%)
Yr 2
Yr 3
Yr 3
Total
bonus profit bonus profit
(5%)
(5%)
$1m
$50k
$75k
$1.5m
$2.5m $125k -$1.5m $0
$2m
Total
bonus
$100k $4.5m $225k
$2.5m $125k $3.5m $250k
•Is it time for risk-adjusted measures to be
used for rewarding CEOs? (but CEOs have
considerable power in influencing pay level
and policy)
•Different pay for performance schemes may
be appropriate for different types of
companies and for different senior executives
within the company
•Stock options are generally inappropriate for
NEDs
•May need to consider raising premiums for
chairmen relative to NEDs in Singapore
•NED fees are too low for some companies
but may be reaching competitive levels for
larger companies
•Attendance fees may be starting to create
dysfunctional incentives in some companies
Questions?
Slides can be downloaded from
www.cgfrc.nus.edu.sg
email:
[email protected];
[email protected]