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The evolving state of directorships in Singapore
The directorship landscape in Singapore has gradually shifted in the last few years, nudged by changes in the global business environment and regulatory shifts. With the recent changes in the Listing Rules and Code of Corporate Governance, announced in August 2018, we could be set for a greater push for change in boardroom composition and practices.
The past and potential changes are highlighted in the Singapore Directorship Report 2018 by the Singapore Institute of Directors (SID). The latest report was based on the 2017 annual reports of all 737 listed companies and trusts in Singapore.
Now in its third edition, the biennial reports provide useful snapshots of the state of directorships in Singapore over time. The 2018 report additionally offers insights into the potential gaps in compliance that companies may face once the regulatory changes kick in for financial years beginning in 2019.
The Singapore Directorship Report by SID serves as a benchmark for listed company boards in Singapore.
While companies tend to take compliance issues seriously, and adjust quickly when rules are formalised in the Code or Listing Rules, it is perhaps unfortunate that too often the regulations are taken as baseline requirements, beyond which companies will not venture.
For example, the Code guidelines state that the three key committees (audit, nominating and remuneration) should have at least three members. Few companies have more than the required minimum number of directors, despite the essential functions they perform. Even more telling is that even fewer companies have established a board risk committee, which is not mandatory but strongly recommended in the Code.
Similarly, the practice of appointing a lead independent director when companies have a non-independent chairman only became more prevalent when the Code was amended to require the presence of a lead independent director.
The principle of widespread voluntary adoption of market best practice remains a tenuous concept. A case in point is the slow uptake of women on listed boards, even though the general consensus is that gender diversity enhances the effectiveness of boards. In 2018, women directors occupied just 10.7 per cent of all board seats, a slight improvement from 8.3 per cent in 2014, levels which are significantly below that of most other developed countries.
In contrast, other areas of directorship have seen improvement over the years. The issue of alternate directors was highlighted in the 2014 report, raising the question of whether board members with alternate directors were effectively discharging their responsibilities. Since then, there has been a sharp drop in the practice of appointing alternate directors. In 2018, 29 companies (3.9 per cent of all listed companies) had more than one alternate director, down from 46 companies (6.3 per cent) in 2014.
The focus on director independence has had a strong impact on board composition. A key highlight of the 2018 report is that more than half of all board seats are now held by independent directors.
This is a significant turning point in Singapore’s corporate history. As existing directors retire, companies have taken the opportunity to appoint independent directors with relevant skills, particularly in the audit committee. In addition, there was an increase in the percentage of chairs who are non-independent, non-executive directors or independent directors (45.8 per cent in 2018 vs only 40.9 per cent in 2014). Companies have also sought out more women directors when they appoint new directors.
There have been many improvements in the state of directorship since the first SID directorship report was launched in 2014. However, two worrying trends remain.
First, the pool of directors is ageing significantly. More than a third (37 per cent) of independent directors will become non-independent in the near future, under the nine-year rule.
The 2018 Code of Corporate Governance and related SGX Listing Rules mandate that an independent director who has been a director for an aggregate period of more than nine years must seek the approval of his independence in separate resolutions by all shareholders and shareholders excluding those who serve as directors and CEOs and their associates.
There is thus an urgent need for companies to consider how they can replenish this pool of seasoned and experienced independent directors. This may be critical for the continuing success of Singapore’s listed companies.
Second, the performance gap between large and small market-capitalised companies has grown. For example, the level of disclosure of remuneration of independent directors for large-cap firms in 2018 improved to 77.4 per cent from 61.0 per cent in 2014. Conversely, only 22.3 per cent of small-cap firms complied with director remuneration disclosure in 2018, down from 25.0 per cent in 2014.
This suggests there may be a need to understand the concerns of smaller firms, to improve corporate governance across the board. What is deemed best practice for large-cap firms may impose too much on small-cap firms.
That said, there are other areas in which small companies performed better, such as having lead independent directors when the chairman is not independent. This rose to 20.6 per cent in 2018, up from 16.7 per cent in 2016.
If the lessons of history can help us avoid the repetition of failures, the Singapore Directorship Reports by SID can provide us with a narrative on the state of directorships in Singapore. What we do with the lessons from these reports may determine how robust listed companies in Singapore will become.
The writer is a member of the Singapore Directorship Report 2018 Working Committee of the Singapore Institute of Directors.