How might the Code be tweaked the next time?

THE Singapore Code of Corporate Governance (SCCG) last month underwent its third revamp since it was first introduced in 2002. Throughout the past 16 years, these revamps have been aimed at adapting the Code to suit changing circumstances and to fit the best practices in other developed markets.

The latest revisions focused on enhancing the quality of the Board of Directors - through a tighter definition of independence and through the setting of a hard limit of service for directors at nine years.

To see how the Code has evolved, it is worth recalling that a proposal in 2005 to tighten the definition of independence from substantial shareholders was not accepted.

The reason given was that the "critical feature for directors to be able to exercise their duties effectively is independence of mind and independence from management, rather than independence from substantial shareholding per se. Substantial shareholders do not pose the kind of principal-agent problems that executive directors can potentially pose, and to equate them by treating both as non-independent directors would not be right".

This view was subsequently overturned in 2012, when a 5 per cent shareholding threshold in relation to determining director independence was proposed, to acknowledge that relationships with substantial shareholders may influence directors' exercise of objective judgment and affect board effectiveness.

However, as it was the first time the concept of independence from substantial shareholders was introduced in the Code, the Monetary Authority of Singapore (MAS) decided to implement the recommendation at a higher threshold of 10 per cent, with a view to reviewing the threshold in the future. This has now been done, with the limit now lowered to 5 per cent.

An evolving Code is undoubtedly good for the market and the latest changes will surely help strengthen overall corporate governance by encouraging board renewal and by raising the bar for independence. Hopefully, fresh directorial talent will emerge as companies cast their nets as wide as possible when sourcing for directors.

Despite good progress, the question to ask is this: after the latest revision, is the Code overly focused on directors and their duties, with not enough emphasis on other considerations, such as enhancing disclosure and shareholder interests, or advancing the interests of the broader community?

On this latter point, SIAS recalls that at its annual awards dinner in 2002, the then-chairman of the Corporate Governance Council, JY Pillai, stated that the newly introduced Council would be guided by the principle of the greatest good for the community and that even though shareholders are important members of the community, many other stakeholder interests would have to be considered. We wonder if the latest revisions with its sharpened focus on the board, almost to the exclusion of other areas, satisfies this brief.

No matter, when the Code is next revised, SIAS would like to propose a few areas which might be worth exploring, some drawn from the best practices of our neighbours.

Comply or explain

Whilst observation of the principles in the SCCG is mandatory, adoption of the provisions designed to satisfy those principles is on a "comply or explain" basis. "Comply or explain" has been a central feature of the Code since 2002 and is widely practised around the world because of the appeal on which it is based, namely that market discipline will prevail - ie if the market doesn't like the explanations, it will depress the company's share price.

Whether or not non-complying companies' shares have been thus penalised is debatable but what is unquestionable is that "comply or explain" has bred the practice of providing boilerplate replies, particularly in the area of executive remuneration where those who refuse to give details as per the Code justify this by saying that pay matters are confidential.

SIAS notes that this reason contains no useful information for shareholders but passes without question because it satisfies the requirement of providing an explanation to justify not complying.

To avoid these sorts of meaningless responses, it would be instructive to consider changing "comply or explain" to something that subtly but effectively achieves the desired outcome. In this connection, we note that Malaysia last year revamped its Code and shifted from "comply or explain" to "apply or explain an alternative".

The Malaysian Code emphasises that each recommended practice is supposed to achieve a specified "intended outcome" (intended outcomes are similar to the Principles in the Singapore Code) so if companies do not apply that practice, they have to provide an alternative that would lead to that outcome.

Note that if the intended outcome is worded as "transparent disclosure of senior management's pay so that shareholders can assess whether the remuneration is commensurate with performance", it would certainly be interesting to see what alternatives might be offered by companies that do not want to reveal the relevant salary details.

Whatever the case, it is time, perhaps, for regulators here to consider whether "comply or explain'' needs to be modified, by making it mandatory to "comply or offer an alternative that satisfies the related Principle''.

Trust

We can all appreciate that trust is the bedrock of good governance - companies have to trust that their customers will pay for goods and services, employees and shareholders have to trust that companies will look after their welfare, and even within the ranks of top management, trust is vital - not just between the Board and the CEO but among directors.

Yet the word "trust" did not appear at all in the Singapore Code. This might be because all practices in the Code are geared at building and maintaining trust in the first place, so explicit use of the word is arguably not necessary.

By the same token though, there is no harm in inserting the word "trust'' into the Code to remind companies that without trust, no business can succeed. SIAS notes that in Thailand, the Code states that "Good corporate governance involves not only building investor confidence and trust but also ensuring business integrity and creating long-term business value" whilst in Malaysia, the Code asks companies to CARE (Comprehend, Apply and Report) and states that:

"CARE aims to reinforce mutual trust between companies and their stakeholders by promoting meaningful disclosures that will be relied upon by stakeholders to have effective engagements with the company. It also promotes a culture of openness and mutual respect that benefits both the company and its stakeholders.''

Doing good for the community - and employees

This requirement is slightly harder to pin down - when it was articulated, it represented a fundamental shift from the prevailing mindset at the time, which was that the central aim of corporate governance was to place shareholder interests above all else. It was thus seen as an ambitious attempt to align longer-term national interests with those of the corporate sector - no mean feat in a short-term driven, cut-throat, profit-maximising world.

However, even though the aim of doing good for the community is laudable, the problem is that it is often very difficult to define the community good, and this is made all the more problematic when corporate self-interests enter the equation. The obvious choice would be in sustainability reporting, which has made great advances through the Singapore Exchange's Listing Rules.

It would be good for it to be mandatory for companies to report on employee welfare in their annual reports. Businesses are only as good as the staff which represent them, which means workers are just as important stakeholders as shareholders - perhaps even more so.

Companies should therefore be made to report staff turnover figures, the results of employee satisfaction surveys and measures taken to raise productivity, if any. Whatever the information selected, the aim must be to allow shareholders to assess the quality of the workforce running the businesses that they are invested in.

After all, workers are key members of the community whose interests should also be looked after, and the SCCG does state that "A sustainably successful company is good for myriad stakeholders: employees, suppliers, customers, shareholders, as well as society at large".