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Governance for small and medium firms
Yesterday, I attended my second Gems meeting and once again, it proved to be highly informative and educational. Gems stands for Governance Evaluation for Mid and Small Caps and differs from usual corporate governance assessment frameworks in a few interesting and novel ways. The brainchild of NUS professor Mak Yuen Teen, Gems uses three years of data instead of the usual one year, which recognises that the impact and benefit of governance practices may not be immediate. Second, it tries to look at form rather than substance. Perhaps most importantly, there is great emphasis on the behaviour of company insiders, senior management, the audit profession and how firms treat their shareholders in terms of communication and dividend payments.
There are 6 sections in the Gems blueprint for which points are accumulated - Ownership, Board and Management, Remuneration and Interested Person Transaction Risks, Quality of Financial Reporting and Internal Control, Shareholder Rights and Communications, and Regulatory Risk.
This last category is interesting because it looks at whether companies are incorporated in their countries of operation or countries of listing, and whether based on World Bank's Worldwide Governance Indicators, whether they operate within the top 25% of countries with strongest rule of law.
There is also a bonus category which awards points for greater board independence- for eg, if the Chiarman is not independent, then three bonus points are possible if at least half the board is independent. Under this section, points can also be deducted - for eg if the largest shareholder has control that exceeds his or her beneficial ownership (maybe through cross-shareholdings) then 5 points could be deducted. Also, if a company has been queried by SGX and had trading suspended by the exchange in all 3 assessment years, a 10 points deduction is possible. Furthermore, if a company makes a major announcement within 2 months after it issued a negative response to the exchange, 3 points can be deducted.
I also sit on the SIAS Selection Committee for its Corporate Governance Awards which use similar, though slightly different evaluation criteria for ranking companies. All will be revealed next week when the winners will be announced.