Can Singapore crack down on corporate malpractice before another scandal erupts?
The Code of Corporate Governance has been amended to beef up director independence and enhance board diversity.
Against the stain of corporate scandals tarnishing Singapore’s squeaky clean reputation to the global stage, the Monetary Authority of Singapore (MAS) has approved amendments to the Code of Corporate Governance in an effort to ensure board independence and rein in corporate wrongdoing.
The most prominent rule changes to the Code include efforts to strengthen director independence, lowering the shareholding threshold to determine a director’s independence from 10% to 5% and limiting the tenure for an independent director to nine years through a two-tier shareholders vote.
The Singapore Exchange has already moved to make corresponding changes to its listing rules following the amendments.
“Key changes to the Code to encourage board renewal, strengthen director independence and enhance board diversity will reinforce board competencies,” MAS said in a statement. “Other Code revisions on disclosures of the relationship between remuneration and value creation, and consideration of the interests of groups other than shareholders will encourage better engagement between companies and all stakeholders.”
Reining in malpractice
The move comes just months after the city’s largest ever corruption scandal engulfed Keppel Offshore & Marine who was found to have paid over US$50m in bribes to score 13 contracts with Brazil’s Petrobas and Sete Brasil. The oil rig builder agreed to shell out a record US$422m fine to reach a settlement with criminal authorities in the US, Brazil and Singapore.
Also read: Former Keppel bosses arrested amidst bribery case probe
A spate of other corporate scandals in recent months include tech firms Trek2000 International Ltd. and YuuZoo Corp, railway parts maker Midas Holdings and bearings and seals supplier Raffles United Holding Ltd., who are all under investigation for alleged financial crimes, reports Wall Street Journal.
The amendments, which represent the third refinement since the Code’s establishment in 2001, were therefore lauded as a welcome and long overdue development to improve Singapore’s corporate governance standards which were last amended in 2012.
“In a matured ecosystem, we need a more nimble and adaptable framework, where ‘hot topics’ can be considered, reviewed and implemented in the absence of reviewing the entire Code, which is the current approach,” Irving Low, partner, head of clients & markets and deputy head of advisory at KPMG told Singapore Business Review.
Another major amendment requires to have at least a third of their boards composed of independent directors (ID). However, if the chairman is not independent, the majority of the board must compose of IDs - otherwise, the majority of the board must comprise non-executive directors.
"This departure from the previous version, we think is an improvement. In the previous version of the Code, where the Chairman and CEO are not independent, a Lead Independent Director is required to be appointed, which may not necessary be a majority Board," Low added.
This comes along with a nine-year tenure limit that will re-evaluate the independence of the ID after such period in the role.
Roughly 30% of IDs in Singapore have held their respective seats for over nine years, raising concerns about their independence from corporate affairs and ability to act as checks-and-balance.
“This is a good move by the Corporate Governance Council as it will help to introduce more diverse and independent viewpoints in Board discussions and eventually drive better decisions reflective of the needs of all stakeholders of the companies,” said Sing Hwee Neo, Partner, Advisory Services at Ernst & Young Advisory Pte. Ltd.
“Regular rotation and refreshment of Board members to introduce fresh perspectives will ultimately benefit the company and its shareholders,” he added.
The amendment will also pave the way for more active engagement from minority shareholders and support a progressive board composition featuring new skillsets, capabilities and ideas, KPMG's Low added.
However, there are some areas in the Code that could still benefit from further guidance and clarification.
"There are merits to requiring disclosures on the relationships between remuneration, performance and value creation under the revised Principle 8. That said, some clarifications or examples of what constitutes “value creation” may be useful to assist companies in satisfying this disclosure requirement," said David Chew, Southeast Asia Leader for the Deloitte Center for Corporate Governance.
There are also some areas such as those exposed to the disruptive technologies that may need more oversight in the coming years. "Technology risks and how the Board and Management manage this will also require more guidance and attention in the not so distant future," Low added.
The MAS also approved the proposal to set up an industry-led Corporate Governance Advisory Committee (CGAC) by the end of the year.
The CGAC will serve as a more permanent and centralised body to monitor companies implementation of the Code and advocate good corporate governance practice. The body will also advise regulators on corporate governance issues.
“The CGAC will be able to act as a platform for firms, investors and markets to provide feedback and areas of improvement in good corporate governance practices. The CGAC can also serve as a channel for firms to enhance their engagement with material stakeholders,” Deloitte's Chew added.
Neo echoed the hopeful sentiment. "[W]e hope that the CGAC will be able to support a better understanding and adoption of good corporate governance practices, particularly over “The Board’s Conduct of Affairs” and “Accountability and Audit”, which are key to create greater performance, protect shareholder value, and engender greater market and stakeholder confidence."
However, Neo cautions that the code's effectivity hinges on an important factor.
"Whilst there can be further improvements gleaned from other codes or leading practices in general, any code is only as good as the practices implemented by companies."
The revised Code will kick into effect on 1 January 2019 except for the rules on the 9-year tenor for independent directors and the requirement for independent directors to comprise one-third of the board which come into effect on 1 January 2022.