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A governance code for the future economy

On 6 August 2018, the Monetary Authority of Singapore released the revised Code of Corporate Governance, and the SGX will update its Listing Rules for consequential changes to the Code. In addition, a detailed set of Practice Guidance was introduced for voluntary adoption.

Collectively, these revisions represent a major, systematic reconfiguration of Singapore’s corporate governance regulations. Overall, the Code has been streamlined by reducing three principles and 31 provisions. The result is an 18-page revised Code (including the cover) compared to 33 pages of the previous 2012 version.

That said, certain guidelines in the 2012 Code have been moved to the Listing Rules for mandatory compliance, and a couple of new provisions have been added to the “comply or explain” Code, while many of the 2012 Code guidelines were moved to the Practice Guidance for voluntary adoption.

The key revisions

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Among the reforms, probably the most important relates to strengthening board composition in terms of diversity and independence.

One would expect that with all the advocacy around women on boards, board diversity would naturally get strengthened. Well, it has, in a sense. There is a provision that requires that companies have and disclose a board diversity policy and report on progress against its objectives.

It is notable that the Code also emphasises that diversity goes beyond gender and specifically added in “age” as a dimension of diversity.

Board and director independence have been even more strengthened.

The requirement that at least one-third of the board should comprise independent directors will be “hard-coded” into the Listing Rules in 2022, whilst a requirement that a majority of the board comprises non-executive directors has been included in the Code for the first time. In addition, the requirement for independent directors on a board with a non-independent chairman has been nudged from “at least half” to “a majority”.

More so is the enhancement of the nine-year rule. It will no longer be left to the nominating committee to perform a “particularly rigorous review” of long-serving directors. Come 2022, the continued classification of directors as being independent after nine years on the board, must be approved via a unique two-tier voting process. This is also enshrined in the Listing Rules.

But besides coming to grips with the specific changes, it is equally important to understand why the revised corporate governance framework matters for Singapore as it transits to the future economy.

Why the revisions

When deliberating the revisions to the Code, the Corporate Governance Council went back to the drawing board. The changes it eventually recommended were based on the sensible assumption that a board acting independently, especially in relation to management, will be able to better uphold the interests of all stakeholders, especially the shareholders.

This is crucial as the operating environment for companies is expected to become more volatile and uncertain. To thrive, boards will inevitably be forced to take on more risks. They will have to manoeuvre through the economy adroitly and make tough calls. In such circumstances, effective corporate governance becomes an important risk moderator.

On the same day that the new Code was announced, the Singapore Governance and Transparency Index 2018 was released. The results on certain specific aspects of risk governance were mixed and, in some cases, worrying. For example, while 92 per cent of listed companies have assurances from the CEO and CFO about the adequacy and effectiveness of the company’s internal controls and risk management systems, only 52 per cent disclose the processes and frameworks used to assess that adequacy and effectiveness.

More revealingly, only 5 per cent of listed boards set risk tolerance levels or have policies that describe the tolerances for various classes of risks. Interestingly, only 15 per cent of companies have fully independent board-level risk committees.

Risk and governance

Beyond these statistics, we have also recently seen examples of large companies like Keppel, SingPost and Hyflux being beset with the public fallout arising from their management of the reputational, structural and financial risks, even though some of the consequences may not have been directly attributable to the actions of their directors.

Now, governance and risk are two sides of the same coin. While corporate governance regulations, including the Code, often consider risk governance as a specific pillar, risk actually integrates and cuts across all areas of governance.

The 2018 revisions are all about risk management in that broader sense. They explicitly recognise that corporate decisions rest with (fallible) humans who serve on the boards of companies. And while there is no way to fully regulate (nor guarantee) appropriate human behaviour, the least that can be done is to institutionally mitigate as much as possible any corporate misalignments that may arise from that behaviour.

This is the crux of the revisions. It is about encouraging companies to step on the growth accelerator and take on risks, but without losing sight of fundamental principles especially as they relate to their sustained, long-term wellbeing. To that end, we need mechanisms, much like the proverbial steering wheel and brakes, to ensure that the safety and interests of stakeholders can be synced with choices made by the decision makers.

Because beneath all the specific rules associated with the new corporate governance reforms, the most fundamental rationale is really altruistic in nature. Specifically, it is one that balances risk-taking with the reassurance of adequate governance.

The writer is a member of the Corporate Governance Benchmarks Committee of the Singapore Institute of Directors.