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Why Investors Should Care About Corporate Governance Matters When Investing In Listed Companies

Retail investors usually face serious monetary losses when a company has corporate governance scandals.


We have seen how lapsed governance efforts has led to corporate governance scandals in recent years.

Commodity trader Noble Group was issued a record fine for inflating reported profits and net assets in its financial statements after a 45-month probe.

Meanwhile, water treatment firm Hyflux filed for bankruptcy protection and then entered into liquidation. Last year, it’s former CEO Olivia Lum, CFO and some Independent Directors were charged for corporate governance breaches.

Other scandals include the corruption scandal that engulfed Keppel Offshore and Marine, and alleged financial crimes from Midas Holdings and YuuZoo Corp.

Corporate governance is something that people don’t pay attention to enough and yet when companies enter troubled states, the root cause of the problem is often the governance itself. A larger concern is that when corporate governance fails to be observed and a company goes into distress, retail investors are the usually ones who bear the brunt of the problems with monetary losses.

Another cause for worry: As market conditions are impacted by inflation and fears of a possible recession this year, some companies that have low cashflow could face funding issues and that can potentially lead to more corporate governance failures.

Instead of leaning towards a hindsight 20/20 mindset, it would be better to take preventive corporate governance measures than to regret when things already happen and it’s too late.

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The SGX Code Of Corporate Governance

For investors to understand the crux of the corporate governance scene in Singapore, they will have to get to know the Code Of Corporate Governance.

How are companies governed and to what purpose? Who has power and accountability and makes decisions regarding the business? These corporate governance issues were already matters that the Singapore authorities observed as an important aspect for listed companies since the 1990s.

The Code Of Corporate Governance focuses on providing guidelines and principles to listed companies and their boards to spur them towards a high standard of corporate governance.

The Code serves as the primary source of best practices regulating corporate governance practices in Singapore. It aims to promote “high levels of corporate governance in Singapore by putting forth Principles of good corporate governance and Provisions with which companies are expected to comply”.

Topics on the Code include Board Matters, Remuneration Matters, Accountability And Audit, Shareholder Rights And Engagement and Managing Stakeholder Relationships.

The first Code of Corporate Governance was adopted in Singapore in 2001. Since then, the code has been amended three times, the last being in 2018. After considering the various approaches to regulating corporate governance around the world, the Corporate Governance Committee in 2001 recommended that the Singapore Code adopts a balanced approach in promoting good corporate governance, which is influenced by Canada and United Kingdom’s (UK) regulatory regimes.

  • The Code of Corporate Governance came under the purview of the Monetary Authority of Singapore (MAS) and Singapore Exchange (SGX) with effect from 1 Sept 2007.
  • Listed companies are required under the Singapore Exchange Listing Rules to disclose their corporate governance practices and give explanations for deviations from the Code in their annual reports.
  • The Code was amended on 14 July 2005, on 2 May 2012, and in 2018.

Prominent rule changes from the 2018 amendment include efforts to strengthen director independence, lowering the shareholding threshold to determine a director’s independence from 10% to 5%, and limiting the tenure for an Independent Director to nine years through a two-tier shareholder vote.

Last month, the SGX Regulation (SGX RegCo) announced that it will limit to nine years the tenure of Independent Directors serving on the boards of issuers listed on SGX-ST. Effective immediately, the two-tier vote mechanism for issuers to retain long serving Independent Directors who have served for more than nine years was removed. Issuers are also required to disclose the exact amount and breakdown of remuneration paid to directors and the CEO in their annual reports.

To ensure that the standards are achieved and sustained in practice, SGX noted that active and constructive shareholder relations is crucial.

How Does Singapore Listed Firms Rank In Corporate Governance?

According to financial data firm Refinitiv, in 2021 two out of the top 100 companies in the world leading in corporate governance are Singapore firms.

Singtel was ranked 40th, while XP Power was 63rd. Both had an overall governance score of around 93%. The scoring matrix looks at CSR, management, and shareholder treatment.

Most companies that scored highly on governance practices are from the UK, United States, Australia, and Japan. Sectors with the highest number of companies doing well on governance practices include Mineral Resources, Banking and Investment Services, and Food & Beverages.

Clearly Singapore seems to be punching above its weight in corporate governance efforts in spite of it being a small country, but one must note that only some prominent companies are recognised for these standards.

On the individual level, more can be done to move the needle here as corporate governance scandals are still a cause for concern. 

Why The Person Helming The Top Job Is Important In Corporate Governance

When researching on which company to invest in, an important deciding factor is to find out more about the CEO and/or Chairman of the business. This is important because a leader of the company sets the strategy for the organisation. He/she also has to be ethical to set the company in the right direction.

In the SGX Code of Corporate Governance, the practice guidance for the Chairman and CEO of a company is as follows:

  • The separation of the role of the Chairman of the Board (Chairman) from that of the Chief Executive Officer (CEO) avoids concentration of power in one individual, and ensures a degree of checks and balances.
  • Where the Nominating Committee determines that the Chairman and CEO share close family ties, the Chairman is not independent. Such ties include familial relationships beyond immediate family members that could influence the impartiality of the Chairman. Examples of these relationships include those of in-laws, cousins, aunts, uncles and grandparents.

The overall role of the Chairman is to lead and ensure the effectiveness of the Board. This includes:

  • promoting a culture of openness and debate at the Board;
  • facilitating the effective contribution of all directors; and
  • promoting high standards of corporate governance.

Externally, the Chairman is the face of the Board, and should ensure effective communication with shareholders and other stakeholders. Within the company, the Chairman should ensure appropriate relations within the Board, and between the Board and Management, in particular, between the Board and the CEO.

Companies that follow such standards will be able to have safeguards as the group of people surrounding the person can flag issues and problems with less bias.

As for companies that are family-run, having a more diversified Board will help to provide some checks and balances, but investors should know that decision making will most likely go to the leaders who are also family members.

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Having Independent Directors To Keep Track Of The Business And The Team

Investors who want to consider businesses that have a fairer play in terms of Board decisions favouring all parties (including stakeholders) instead of Board Members more, should look at the Board leadership when doing your research for a company.

Roughly three out of 10 Independent Directors in Singapore have held their seats for over nine years. Some Board Members are people who have links with the company, including friends of the CEO and ex-colleagues.

This Board structure is more prevalent in Asia, where family-run businesses are also listed companies.

In order to provide better corporate practices to prevent biased behavior among board members, The MAS and SGX Code rules noted that from January 2022, Independent Directors are required to comprise a third of the board. However, if the Chairman is not independent, the majority of the board must compose of Independent Directors – otherwise, the majority of the board must comprise Non-Executive Directors.

There is also the new rule – the hard tenure limit for Independent Directors of nine years, beyond which such Directors will no longer be considered independent. But these Directors are still allowed some leeway and continue to be considered Independent until the conclusion of the next Annual General Meeting.

Independent Directors, serve as individuals who will keep track of the management team to prevent errant behaviors by executives or the management. A regular rotation and refreshment of Board members introduces fresh perspective and sets to reduce collusion.

However, there are also limitations to this too as the management decides what information is available to the Board of Directors. Moreover, Independent Directors who sit on too many boards of companies also do not have enough time to monitor every company to ensure they are following rules and processes.

Checks On Disclosures On Salaries And Remunerations Of Top Management

As an investor, it would be important to check if the company discloses the remuneration of top management, and if it doesn’t why is it not disclosing, and any efforts from the company to reflect greater transparency.

When the market is uncertain like in the current economic climate, it is even more concerning when there is a lack of disclosure of remuneration from the top earners of a company as a company may be in the red but still paying large sums of remuneration to the management.

In Singapore, the recent rules state that issuers have to disclose the exact amount and breakdown of remuneration paid to directors and the CEO in their annual reports. It will take effect for annual reports prepared for financial years ending on or after 31 December, 2024.

Only 53% of Singapore listed firms fully disclose their salaries of top staff, according to a biannual survey by the Singapore Institute of Directors. The SID survey had polled respondents from SMEs to large firms across various sectors between May and July last year.

94% of those who did not provide full disclosure in the survey then had said they do not plan to do so in the next two years.

This attitude towards remuneration has not progressed much from the private sector even after much debate about it, perhaps due to cultural resistance. The disclosure of remuneration has always been a sensitive topic in Asian countries, especially Singapore.

Back in 2001 when the Code was first introduced, the Corporate Governance Committee then had acknowledged the need to strike a balance on the extent of disclosure of individual directors’ remuneration and the need to maintain privacy on the disclosure of the exact remuneration packages received by the concerned parties.

To compare, Britain, Hong Kong, Malaysia and the United States mandate the disclosure of the exact amounts and the breakdown of the remuneration paid to directors and key executives.

Whistleblowing Channels, General Meetings, And Investor Watchdogs Like SIAS Help To Keep Companies In Check

Investor watchdogs help to keep an eye on companies and flag problems to retail investors. It also offers as a resource for investor education knowledge and information to better educate retail investors.

For example, investors associations like the Securities Investors Association (Singapore) (SIAS) act as an entity to post questions to listed firms on behalf of investors.

It is also almost like an intermediary that helps resolve disputes between investors and companies. The topics it covers are a broad range – from governance to financial statements and sustainability. It also works with Stamford Law to help its members understand investment rights regarding the investments they hold.

The investor association in collaboration with NUS Business School and the Centre for Governance and Sustainability (CGS), also conducts research on listed companies on their corporate governance practices and releases corporate governance reports.

Channels such as these provide a robust ecosystem on investor education and helps investors stay alert about corporate governance issues.

Beyond that, individuals like shareholders and employees of the companies can also do their part to ensure good corporate practices.

In Singapore, shareholders are allowed to speak out or ask questions at general meetings. Investors can attend general meetings and flag any governance concerns to the board. It is true that not every investor will want to stand in front of everyone and raise issues or may not know enough to raise questions, but as a start, one can attend the general meetings to learn more about the concerns from other investors.

This allows the investor to be actively attuned to the discussions of the company.

Whistleblowing is also an important tool in corporate governance strategy as it empowers individuals with less authority (usually employees) to flag on incidences of misconduct.

The SGX RegCo has established a Whistleblowing Office as a confidential and dedicated channel for members of the public and investors to report any issues or areas of concern relating to listed companies on the exchange.

Individuals or institutions can use the platform to raise concerns about companies listed on SGX.

Walking On The Balancing Tight Rope

There’s only that much an informed investor can do when finding out about a company and its corporate governance efforts.

It has been seen historically that companies do not disclose their governance problems until the final hour and the discovery and the attempted purging of corporate governance misconduct on errant companies are often too little too late. The fines imposed on the wrongful employees may just seem to look like a slap on the wrist, compared with the huge financial losses and the tarnished reputation of the company.

To set an example, the Singapore authorities have convicted people of insider trading and jailed errant individuals. But it still has to strike that complex balance and avoid over regulation.

Like most international securities/stock exchanges, Singapore needs to maintain a “complex balance” between setting high corporate governance standards while ensuring that the bourse remains attractive and the rules are not too onerous for foreign investors and multi-national companies based here.

Featured Image Credit: DollarsAndSense

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