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New corporate governance rating framework for SMEs (Amended)


SOME 79 per cent of listed small and medium enterprises (SMEs) do not have independent directors who are experienced in their industry, and 65 per cent lack the presence of unrelated substantial shareholders, according to a new framework evaluating the corporate governance standards of these companies.

On a more favourable note, only 5 per cent had more than one independent director leaving the organisation in three years or less, and just 10 per cent had independent directors who hold significant relationships with the company, the directors, key officers and substantial shareholders, going by the preliminary findings of an assessment of 471 SMEs.

The new framework - Gems (Governance Evaluation of SMEs) - was developed by corporate governance advocate Mak Yuen Teen, the Securities Investors Association Singapore (SIAS) and the Singapore Association of the Institute of Chartered Secretaries and Administrators (SAICSA). Unveiled on Monday, Gems was created with the view that existing governance ratings may not be sufficiently useful for assessing the governance of smaller companies with scarce resources.

There is no "tiering" of corporate governance guidelines currently, explained Prof Mak, and the Singapore Code of Corporate Governance applies to all listed issuers, which may not necessarily be most appropriate in assessing an SME's corporate governance standards.

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Drawing from UK and Australian systems, Gems covers companies - excluding secondary listings, real estate investment trusts (Reits) and business trusts - which have been listed on the Singapore Exchange (SGX) for at least three years, and have a market capitalisation of no more than S$500 million.

As at September, there were 767 issuers listed on SGX. Excluding those not covered, almost three-quarters of the remaining 701 issuers were small-cap companies, and 69 per cent had a market capitalisation of less than S$300 million.

The preliminary results also revealed that SMEs fell short on the remuneration front. About 88 per cent of SMEs had executive directors and key management officers who received less than 20 per cent of their pay in variable remuneration, and for 63 per cent, the increase in directors' fees was not correlated with the increase in the number of independent directors, board and committee meetings, or total shareholder return.

But the findings also showed that 97 per cent of SMEs were audited either by a "Big 4" or a mid-tier firm, and 94 per cent were audited by a certified public accountant in Singapore.

An alternative to Gems would be introducing a tiering of Singapore's existing code of corporate governance, which received mixed reactions when it was introduced at a panel discussion as part of the Singapore Corporate Governance Week.

The chairman of public relations consultancy Citigate Dewe Rogerson, Elaine Lim, said that it was timely. She used to sit on a board of a small company, and the board spent a very intensive first year just doing housekeeping and getting the company to comply with some basic corporate governance requirements. "Therein is a very good example of how difficult it is for small companies to really measure up compared to large caps," she said.

However, Tay Woon Teck, managing director of corporate risk advisory firm RSM Ethos, was not in favour. "I'm against tiering of the corporate governance code for the SMEs," he said. "What we need is good quality companies, no matter how small you are. As long as you follow the principle of good practices, investors will look at you very differently and they will invest in you."

Upon tiering of the current corporate governance code, Singapore could be working "backwards", which is unhealthy for Singapore's capital markets, Mr Tay said. "We cannot afford to have a second class board." 

Jeremy Yee, executive director and group chief executive officer of healthcare SME Cordlife Group, acknowledged that SMEs do not have the resources big companies do to comply with existing corporate governance standards, and said that a certain amount of "tiering" will be good.

But he suggested a "concept of suitable criteria", to allow for each company to be evaluated in terms of corporate governance standards differently, based on their different situation.

"What's good for you may not be good for them," he said.


An earlier version of this article incorrectly stated that the panelist's reaction was to Gems. It was in fact to a proposed tiering of Singapore's Code of Corporate Governance, an alternative approach to assessing the corporate governance standards of SMEs. The article above has been revised to reflect this.

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