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THE OUTLOOK FOR CORPORATE GOVERNANCE. A/P Mak Yuen Teen Director Corporate Governance and Financial Reporting Centre. IIA Singapore 30th Anniversary Conference 2006, 28-29 September, 2006. ?. Outline. What have we achieved? What are current problem areas? What more needs to be done?
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THE OUTLOOK FOR CORPORATE GOVERNANCE A/P Mak Yuen Teen Director Corporate Governance and Financial Reporting Centre IIA Singapore 30th Anniversary Conference 2006, 28-29 September, 2006
Outline • What have we achieved? • What are current problem areas? • What more needs to be done? • by boards • by regulators • by investors • by accountants
What Have We Achieved? A fair bit….
International Accolades • Doing Business 2007 (World Bank) • Singapore ranked No. 2 globally in protection of investors’ interests • Singapore included among the countries that protect investors the most in terms of disclosure, extent of director liability and ease of shareholder lawsuits • CG Watch 2005 (CLSA-ACGA) • Singapore ranked no. 1 among 10 countries (but gap between Singapore and Hong Kong has closed to 1 point, from 8 points previously)
Enforcement of Rules • Singapore has taken prompt enforcement actions with regards to recent corporate scandals (CAO, Citiraya, ACCS, Informatics, Auston) and insider trading violations • Time taken between public disclosure of scandal to charges ranged from 5 months to 19 months. The convictions and sentencing occurred 1 day to 10 months after the charges were first filed.
Our Enforcement Scorecard – 2005-2006 Mak, Y.T., Lan, L.L., Buang, A.B., Implementation and Enforcement of Rules in Singapore and the Case of China Aviation Oil, OECD Asian Corporate Governance Roundtable, September 2006.
Observations from the Singapore CG Awards and Other Reports • Lack of regulatory or market enforcement of “comply or explain” has led to following problems in corporate governance reporting: • false disclosures • non-compliance with comply or explain • partial compliance with no explanations • boilerplate disclosures • Tendency to follow the letter rather than the spirit, and to act legally but not necessarily ethically
Observations from the Singapore CG Awards and Other Reports • Tenure of independent directors • Board interlocks • Multiple directorships • Excessive stock option grants for independent directors/ • Lack of vesting schedule for stock options
Observations from the Singapore CG Awards and Other Reports • Expertise of the Audit Committee • Threats to auditor independence • Risk disclosures • Board’s oversight over internal controls and risk management • Openness to the media and retail investors • Lack of adequate checks and balances at the top for many SESDAQ companies
Other Observations • Some of our laws are generally difficult to enforce, e.g., • S157 on duties of directors (only CEO of CAO charged with this in 5 corporate scandals) • S4 on shadow/de facto directors • S199 of SFA?
Other Observations False or misleading statements, etc.199. No person shall make a statement, or disseminate information, that is false or misleading in a materialparticular andis likely — (a) to induce other persons to subscribe for securities; (b) to induce the sale or purchase of securities by other persons; or (c) to have the effect of raising, lowering, maintaining or stabilising the market price of securities, if, when he makes the statement or disseminates the information — (i) he does not care whether the statement or information is true or false; or (ii) he knows or ought reasonably to have known that the statement or information is false or misleading in a material particular.
Other Observations • Protection of minority shareholder rights • Difficulty/costs faced by minority shareholders of listed companies in taking derivative actions • Costs of class action to seek redress for losses suffered by minority shareholders • Expropriation of minority investors by controlling shareholders in practice remain a concern
What More Needs to be Done – Boards • Focus on the 3 C’s in appointing directors/CEO – character, commitment and competence • Pay independent directors adequately and in appropriate ways (discontinue stock options) • Independent directors need to commit more time to understand the business and be more involved in strategy (over-specialisation of independent directors?) • “Independent” directors need to act more independently and be more sensitive to minority shareholders’ interests • Independent directors need to pay more attention to the quality/independence of the internal/external audit
What More Needs to be Done - Regulators • Improve enforcement of rules, including listing rules • Hold directors, including independent directors, accountable for gross negligence (consider different types of sanctions, like fines and disqualifications) • Improve rights of minority shareholders with respect to appointment of independent directors and ability to take civil action • Put pressure on institutional investors to become more active
What More Needs to be Done –Investors • Apply pressure on companies to follow the comply or explain approach • Challenge disclosures made by companies about their corporate governance • Ask more intelligent questions, especially about director appointments (tenure, interlocks, multiple directorships), remuneration policies, strategies • Fund managers need to be more visible at AGM and engage companies more • Local and foreign institutional investors should collaborate to engage companies
What More Needs to be Done – Accountants • External auditors need to be more independent of companies and management • Address issue of consistency of quality of audit (including within the same accounting firm) • Internal auditors need to ensure that their work is up to standard (internal and external reviews of their work)
CGFRC Conference on “Reforming Governance in the Non-Profit Sector: Beyond Rules and Regulations”, 2 November 2006 [Riverfront Furama Hotel, only $50!] Thank You! Q & A Presentation can be downloaded from www.cgfrc.nus.edu.sg
