Singapore Code of Corporate Governance

Singapore Code of Corporate Governance

Singapore Code of Corporate Governance Is the main aim of the Singapore Code of Corporate Governance to make managers less selfish? How does it attempt to do this? Introduction Singapore is an open market working on attracting international investment through high standards of corporate governance. Singapore has evolved from a regulatory structure to a more market-driven system whose focus is on achieving greater transparency. Investors highly depend on the managers of listed companies in running the company and timely disclosing material information. The Code of Corporate Governance provides guidelines for corporate disclosure and governance (Kaur et al, 2013). Characteristics of Corporate Governance in Singapore Singapore is underdeveloped in corporate governance compared to the United States and the United Kingdom standards (Young et al, 2008). Underdevelopment is attributable to the disclosure regime, ownership structure, use of share option schemes, structure of the board of directors, and government corporate ownership. A study by Hong-Kong based research firm CLSA and Asian Corporate Governance Association in 2007 found that Singapore ranked second after Hong Kong in eleven markets (CLSA, 2007). According to the study, Singapore’s strengths included: timeliness of financial reporting, audit standards, regulatory deterrence against insider trading and organized retail shareholder body. The weaknesses included: limited legal remedies for investors, limited disclosure of individual director remuneration and permission of discounted stock options Chen et al, (2009) also highlights some of the legal challenges that face corporate investors in Singapore’s economy. Another study in 2007 by the Securities Investors Association of Singapore found that the percentage of listed companies with whistle blowing policy had increased from 5% in 2006 to 36% in 2007. Companies were also providing more details about the directors such as educational qualifications. However, 87% of companies did not have independent chairman, while 58% separated the responsibilities of the chairman and the chief executive officer and only 5% disclosed the exact remuneration of directors (Kaur et al, 2013). Corporate governance in Singapore is also characterized by rarity of takeovers as a result of the way of business undertakings and concern by banks in sponsoring such undertakings. Companies also lack external mechanisms of takeovers to control managerial behavior. In addition, the government significantly owns the private sector to an extent that it is difficult to launch takeover attempts in the country (Kaur et al, 2013). In practice, the high concentration of ownership and poor disclosure, in addition to ambiguous rules-of-the-game in the takeover market operate in favor of owner-managers who are capable of exploiting the weak bargaining power of minority shareholders (Eng and Mark, 2003; Lemmon and Lins, 2003). Institutional monitoring is limited to the Monetary Authority where financial institutions are involved, and the Stock Exchange for other organizations. The Singapore Code of Corporate Governance 2012 The Singapore Code of Corporate Governance was introduced in 2001 in line with the standards promulgated by the Organization for Economic Cooperation and Development in 2000 (Leong et al, 2011). It was first revised in 2005 and then in 2012. The Code contains 15 principles, supplemented by Guidelines and Commentaries, which are associated with board matters, remuneration matters, audit and accountability, communication with shareholders, and disclosure of corporate governance arrangements (Monetary Authority of Singapore, 2012). 1. Board Matters (Principles 1 to 6) These consist of six aspects: a. Board’s Conduct of Affairs: Every company must be headed by an effective board. The role of the board includes monitoring, strategy, resource, and service provision. b. Board Composition: The board should consist of at least 1/3 independent members and ½ independent directors. The Chairman of the board and the chief executive members are immediate family members, or the same person. The chairman is part of the management, but not an independent director. In such companies, an independent director is appointed to be the lead independent director. The lead independent director plays a role of resolving problems concerning shareholders where contact through the normal channels of the Chairman, the chief executive officer or equivalent has failed to resolve or is inappropriate. The independent directors are supposed to meet on a periodical basis in the absence of other directors, after which the lead independent director should provide feedback to the Chairman. The Singapore Code of Corporate Governance 2012 defines an independent director as “one who has no relationship with the company, its related corporations, its 10% shareholders or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director’s independent business with a view to the best interests of the company”. c. There is a clear separation of responsibilities between the Chairman and the chief executive officer. d. New directors are appointed through a formal and transparent process by the Nomination Committee. The Nomination Committee comprises of a minimum of three directors, half of whom, including the chairman of the committee, are independent. e. The overall board and individual directors should be formally assessed to gauge the performance of the board. f. All members should be provided with timely and adequate information prior to board meetings and on-going basis. 2. Remuneration Matters (Principles 7 to 9) Remuneration follows formal and transparent procedures. The remuneration committee consists of non-executive directors, most of whom, including the chairman of the committee, are independent. The level of remuneration should be appropriate for attraction, retention and motivation of directors. Companies are required to ensure disclosure of each individual director and the chief executive officer on a named basis. In addition, remuneration should be broken down in percentage terms of base/fixed salary, variable salary, benefits in kind, stock option and other long-term benefits. 3. Accountability (Principles 10 to 13) The audit committee consists of a minimum of three directors, who are non-executive members and majority of them, including the chairman of the committee are independent. The board is charged with ensuring that management maintains a sound system of internal controls. In addition, companies have internal audits which include in-house, outsourced, major shareholder, or controlling enterprise. 4. Communication with Shareholders (Principles 14 to 15) Companies should ensure that information is disclosed on a timely basis. Shareholders should be given the opportunity for effective participation and voting in annual general meetings. The shareholders can vote in person or in absentia. 5. Disclosure of Corporate Governance Arrangements Although compliance with the Code is not compulsory, listed companies are required by the SGX Listing Manual to describe their corporate governance arrangements with specific reference to the Code in their annual report. In addition, they must disclose any deviations from any guidelines and give appropriate explanations for such deviations in their annual report. How the Code attempts to make managers less selfish The aim of the Code is to encourage companies (particularly listed companies) employ practices which focus on providing accountability while creating long-term shareholder value, and securing adequate disclosure in order to give stakeholders the opportunity to assess the governance practices of the company and thus respond in an informed manner. By making the management accountable and transparent, the Code helps in making sure that managers do not behave in a selfish manner which can shun away investors and other stakeholders (Oh et al, 2011; Low, 2012). Given that most companies in Singapore are family-owned, it is in order to argue that most management decisions and actions would be more tailored towards family interests and conflicts are bound to arise. The code encourages various key practices, which if adopted can help in reducing selfishness in management and making it more objective-oriented. The practices include: 1) Having an effective board that understands its roles and responsibilities and which is furnished with relevant information to effectively perform its functions. The board is responsible for the company’s overall strategic plans and performance objectives, major operational initiatives, financial plans and annual budget and major funding and investment proposals, corporate governance practices, compliance and accountability systems and financial performance reviews. In the Singtel Company, the Board is responsible for appointing the company’s chief executive officer, approving the policies and guidelines for Board and Executive Management remuneration, and approving the appointment of directors. in addition, the Board is also responsible for overseeing long-term succession planning for Executive Management (SingTel, 2012). Though the chairman is part of the management, he or she cannot be an independent director. As a result, the management is kept away from influencing the decisions of the independent directors to meet its own interests. 2) Having a strong independent element on the board with equal concentration of power among all the members. The lead independent director is responsible for leading the activities of non-executive directors in situations where it is deemed inappropriate for the chairman to serve in such circumstance (SingTel, 2012). Independent directors are not comprised of the chairman. They are able to make sound judgments, basing on their qualifications and expertise, without the influence of managers. 3) Having formal and transparent processes for board appointments, performance and board and executive remuneration. This is facilitated by the appointment of nomination and remuneration committees for purposes of overseeing these matters (SingTel, 2012). Transparency ensures that every decision and every action is subjected to scrutiny by the employees and other stakeholders. The SingTel remuneration structure is designed such that the percent of the variable component of the remuneration of the Executive Management increases as they move up the organization. The variable component is also based on the tangible achievement of individual performance objectives and corporate targets. The value and cost of the components of remuneration are regarded as a whole and are structured to ensure balance between long-term and short-term objectives, as well as maintain competitiveness with market practice. 4) Putting emphasis on the relevance of accountability and audit, and requiring the creation of internal audit function and audit committees. When the internal control function and the audit committee are aware that their work will be reported externally and scrutinized by investors, they become more rigorous (SingTel, 2012). The management will generally become conscious about its activities and avoid some practices that can lead to a bad public image. Internal audit function and audit committees ensure that there are effective checks and balances on the decisions and actions of each and every member of the management team. 5) Establishing and maintaining of strong internal control processes. Through this, investors are able to prevent possible losses resulting from internal control failures and business probity risks. The code provides an opportunity for investors to replace the existing directors is they foresee future dangers through disclosure. Furthermore, the need to produce an annual report on internal controls promotes scrutiny from shareholders and other stakeholders. It is possible to achieve effective scrutiny when things are made more transparent. 6) Promoting more disclosure for, and communication with, with shareholders. More disclosure promotes the confidence and satisfaction of shareholders. It is important that investors have confidence in internal controls of the firms in which they make their investments, and increased knowledge will encourage this. In addition, mandatory external reporting on internal controls will ensure that good practices inside the firm are encouraged (SingTel, 2012). Conclusion The main goal of the Singapore Code of Corporate Governance 2012 is to ensure transparency and accountability in corporate governance of listed companies (Rashid and Yoshikawa, 2012). Through transparent processes, the managers are subjected to scrutiny by all stakeholders. There are effective checks and balances which keep managers on their toes and ensure that they do not engage in practices which reflect their own interests rather than the interests of the company (Tsui-Auch., 2012). The Compulsory disclosure of relevant information to all stakeholders and provision of explanation in the case of deviance are effective mechanisms of ensuring that managers do not pursue conflicting interests. The separation of roles and responsibilities between the chairman and the chief executive officer promotes transparency and accountability. Independent directors also promote transparency since they will not be influenced by company managers in their decisions and actions. In addition, the audits committees and strong internal functions will ensure that all relevant information is made available to the stakeholders for scrutiny. Remuneration procedures have also been formalized and made transparent and this promotes fairness and accountability, thus eliminating chances of fraud. References Chen, K. C., Chen, Z., & Wei, K. C. 2009. Legal protection of investors, corporate governance, and the cost of equity capital. Journal of Corporate Finance, 15(3), 273-289. CLSA 2007 CLSA Launches Corporate Governance Watch 2007, CLSA-Asia’s Independent Voice. Retrieved from https://www.clsa.com/about-clsa/media-centre/2007-media-releases/20070925_en.php on August 19, 2013 Eng, L. L., & Mak, Y. T. 2003. Corporate governance and voluntary disclosure. Journal of accounting and public policy, 22(4), 325-345. Kaur, N., Huat, O. N., Fong, R., Lee. J., & Hu, G. 2013. Ethics and Governance. Lecture 10. Lemmon, M. L., & Lins, K. V. 2003. Ownership structure, corporate governance, and firm value: Evidence from the East Asian financial crisis. The journal of finance, 58(4), 1445-1468. Leong, C. H., Teo, Y. T., & Lin, S. 2011. A study of revised code of corporate governance in Singapore. Low, P. 2012. The Classic Leadership Sins And the Way Forward Through the Confucian Visor. Business Journal for Entrepreneurs, 2012(1), 119-136. Monetary Authority of Singapore. (2012). Code of Corporate Governance. Retrieved from: http://www.mas.gov.sg/regulations-and-financial-stability/regulatory-and-supervisory-framework/corporate-governance/corporate-governance-of-listed-companies/code-of-corporate-governance.aspx on August 19, 2013 Oh, H. L., See, S. T., & Tang, C. W. 2011. An empirical study on corporate governance and its impact on investors’ confidence. Rasheed, A., & Yoshikawa, T. (Eds.). 2012. The Convergence of Corporate Governance: Promise and Prospects. Palgrave Macmillan. SingTel 2012 Annual Report on Corporate Governance.Retrieved from: http://info.singtel.com/annualreport/2012/corporate-governance.html on August 19, 2013 Tsui-Auch, L. S. 2012. Converging Divergence in Corporate Governance in Singapore. The Convergence of Corporate Governance: Promise and Prospects, 169. Young, M. N., Peng, M. W., Ahlstrom, D., Bruton, G. D., & Jiang, Y. 2008. Corporate governance in emerging economies: A review of the principal–principal perspective. Journal of Management Studies, 45(1), 196-220.

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