Governance driving sustainability: Reaching a renewed compact
THE last year has seen a challenging corporate environment, as companies experienced first-hand the vital importance of adaptability and resilience. As the Covid-19 situation in Singapore went through its various phases, companies had to adapt to the accompanying regulatory changes in safe management measures.
Amid this, Singapore-listed companies have generally continued to improve their corporate governance practices and processes. The mean overall score of the Singapore Governance and Transparency Index (SGTI) 2022 rose slightly to 70.6. This represents an increase of almost 2 points, and has allowed the Index to breach 70 points for the first time.
The SGTI assessment framework is based on 5 dimensions. On average, scores in each of the 5 sections rose in 2022. This is another improvement over last year, when there were improvements in 3 of the 5 sections. The mean scores in Engagement of Stakeholders and Disclosure and Transparency saw the highest increase this year, which is notable because these 2 sections are among those with the lowest average scores. Although this is partly to be expected because these areas would have greater room for improvement, it is also heartening because it shows companies are putting more effort into areas of governance to which they have typically given less attention.
Sustainability: Emerging and embedding
Sustainability practices and processes are emerging from being a niche concern among Singapore companies and becoming embedded into the mainstream. This is reflected in disclosures related to ESG (environmental, social and governance): 98 per cent of companies released sustainability reports, up from 89 per cent previously. The share of companies disclosing non-financial performance indicators rose from 37 per cent to more than 50 per cent. Increases were also seen in disclosures of companies’ efforts to ensure their value chain is environmentally friendly, or consistent with promoting sustainable development. From the social and governance perspectives, more companies disclosed their efforts to interact with the community, and released details on their anti-corruption programmes and procedures.
On a related note, the share of companies that reported conducting an external search for new directors fell from 20 per cent to 13 per cent. This may increase again next year, however, following the latest update to the Practice Guidance for the Code of Corporate Governance. The Practice Guidance recommends that Nominating Committees use a variety of sources when appointing new directors. The broadening of recruitment sources may not immediately appear to be related to ESG, but can in fact have a significant impact through enhanced board diversity. When considering sustainability, there may be a need to cast a wider net to include a greater range of governance issues.
Sustainability: Relating and levelling
SGTI 2022 also shows a fall in the overall variation of performance among companies. This can be seen in a number of ways. The correlation coefficient between market capitalisation and overall score, which measures the strength of the linear relationship between these 2 factors, remains at 0.3 (0.37 in 2022, 0.32 in 2021). This is lower than the 0.6 in 2020, and shows that in recent years there has been a weaker relationship between firm size and performance in corporate governance practices.
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This levelling effect becomes clearer in looking at the changes in scores between 2021 and 2022. The lowest-ranking companies in 2021 (approximately 100 companies), increased their overall score by an average of 11.4 points in the 2022 assessment. By comparison, the highest-ranking companies in 2021 (approximately 100 companies) saw their average overall score fall by 2.4 points. Similarly, small-cap companies had a larger increase in their overall score than did big-cap companies.
Sustainability seems to be contributing to this effect. Small companies, and those that are lower-ranked, are becoming more engaged with sustainability-related efforts, and this is helping to boost their performance in corporate governance. Thus, the lowest-ranking companies in SGTI 2021 show a larger increase in scores for the Engagement of Stakeholders section of the assessment framework (1.6 points) than the top-ranked companies (0.1 points). Small-cap companies also showed a slightly larger increase in their Engagement of Stakeholders scores than large-cap companies.
Governance as impetus for sustainability
Sustainability and governance are inextricably linked as the board and senior management provide strategic leadership to achieve sustainable long-term value. More than this, over and above merely forming the “G” in ESG, governance can be said to drive sustainability. Aspects of governance, such as board and board committee issues, risk management and safeguarding shareholder rights, directly or indirectly influence what sustainability looks like in companies.
As sustainability increasingly becomes a corporate imperative, companies would do well to continue strengthening their governance processes and practices. Using a horse and cart analogy, sustainability is the “cart” and governance is the “horse”.
Lawrence Loh, Thi Thuy Nguyen and Annette Singh are, respectively, director, research associate and senior research associate at the Centre for Governance and Sustainability at NUS Business School.
How scoring for the Index is done
The Singapore Governance and Transparency Index (SGTI) is a joint initiative of CPA Australia, NUS Business School’s Centre for Governance and Sustainability (CGS), and Singapore Institute of Directors. The strategic media partner is The Business Times.
The objective of the SGTI is to evaluate listed companies, including Reits and Business Trusts, on their corporate governance practices and disclosures, as well as the timeliness, accessibility and transparency of their financial results.
SGTI is a unified framework comprising two separate categories: the General Category and the Reit and Business Trust Category. These categories are distinct and are not to be compared directly with each other.
For the General Category, the SGTI score has 2 components: the base score and the adjustment for bonuses and penalties. The base score for companies contains 5 sections (“BREAD”): (1) board responsibilities [35 points]; (2) rights of shareholders [20 points]; (3) engagement of stakeholders [10 points]; (4) accountability and audit [10 points]; and (5) disclosure and transparency [25 points]. The aggregate of bonuses and penalties is incorporated to the base score to arrive at the company’s SGTI total score.
For the Reit and Business Trust Category, the companies are evaluated on a similar set of criteria, but with added coverage on the unique nature of their operations. The base score for Reits and Business Trusts includes: items in the base score for the SGTI (converted to 75 points) as well as trust-specific items for Reits and Business Trusts (25 points), which covers 5 aspects (“SLICE”): (1) structure; (2) leverage; (3) interested person transactions; (4) competency of Reit manager/trustee-manager; and (5) emoluments.
SGTI 2022 covers 489 Singapore-listed companies in the General Category as well as 44 Reits and Business Trusts that released their annual reports by May 31, 2022. The sources of information for SGTI assessment include annual reports, sustainability reports, websites and announcements on SGXNet. Announcements made on SGXNet as well as in media coverage that occurred between Jan 1, 2020 and May 31, 2022 have been used to update the scores.
The SGTI assessment is conducted independently with an in-house research team at CGS and guidance from an external advisory panel.
Further information on the scoring methodology, including the full instrument, and past results may be obtained from CGS’s website at https://bschool.nus.edu.sg/cgs/. Queries about the SGTI may be sent to cgs@nus.edu.sg. In order to maintain independence and fairness of the SGTI, reports or advice cannot be provided to individual companies.
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