THE OUTLOOK FOR CORPORATE GOVERNANCE

A/P Mak Yuen TeenDirectorCorporate Governance and Financial Reporting Centre

IIA Singapore 30th Anniversary Conference 2006, 28-29 September, 2006

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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 Party charged Number

Company 1 (Auston)Chairman 2 (Informatics, CAO)Non-executive directors 2 (CAO)Independent directors 0

CEO 4 (1 missing)CFO 3 (CAO, Citiraya, ACCS)Other employees 17Others (suppliers, etc.) 10 + 11 for insider trading

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.

Singapore CG Awards 2006Corporate Governance Practice – Board Matters 2006(%)

Do independent directors constitute more than 1/3 of the board? 91%

Do independent directors constitute more than 1/2 of the board? 19%

Are the chairman and CEO positions held by separate persons? 62%

Are the chairman and CEO positions held by unrelated persons? 38%

Is attendance of individual directors at board meetings disclosed? 90%

Is the frequency of board meetings disclosed? 95%

Did the board meet more than 6 times in the year? 12%

Are all directors attending at least 80% of the board meetings? 80%

Are the type of material transactions that must be approved by the board disclosed? 90%

Singapore CG Awards 2006Corporate Governance Practice – Board Matters 2006(%)

Does the company provide training (either in-house or externally) for all of its directors? 7%

Does the company provide ongoing training (in-house or externally) on issues beyond basic director duties and liabilities? 44%

Is there an induction/orientation program for all new directors? 45%

Are details of previous experience, educational qualificatons and all other listed directorships of each director disclosed? 17%

Do directors have separate and independent access to company’s senior management? 83%

Singapore CG Awards 2006Corporate Governance Practice – Nomination Matters 2006(%)

Does the company have a nominating committee? 92%

Is the majority of nominating committee independent? 86%

Is the chairman of the nominating committee independent? 86%

Has the nominating committee reviewed, at least annually, whether or not a director is independent? 26%

Has the nominating committee reviewed the adequacy of time spent by directors on the affairs of each company? 9%

Was appraisal of board performance conducted? 26%

Is disclosure made of the process of board evaluation? (e.g. conducted by external party, conducted by NC, conducted by board etc.) 62%

Singapore CG Awards 2006Corporate Governance Practice – Nomination Matters 2006(%)

Does director remuneration include long term incentives? E.g. bonuses payable after 12 months and/or share option with a vesting period > 12 months 31%

Are criteria used for evaluating board performance disclosed? e.g. Company’s share price performance over past years; Return on assets; Return on equity; Return on investment; Economic value added; Profitability on capital employed 28%

Is individual performance of board members evaluated? 17%

Is disclosure made of the process of director evaluation? (e.g. conducted by external party, conducted by NC, by board etc.) 49%

Are criteria used for individual director performance evaluation disclosed? 24%

Singapore CG Awards 2006Corporate Governance Practice – Remuneration Matters 2006(%)

Does the company have a remuneration committee? 94%

Are all members of the RC independent directors? 17%

Is the remuneration committee chaired by an independent non-executive director? 86%

Is disclosure made of the remuneration committee’s processes (e.g. external compensation specialists hired) to ascertain industry practices and salary levels for pay and employment conditions? 18%

Is executive director compensation linked to industry, company and/or individual performance? 57%

Are the fees of non-executive directors linked to their level of contribution and responsibilities, and time spent and effort? 46%

Singapore CG Awards 2006

Corporate Governance Practice – Remuneration Matters 2006(%)

Is disclosure made to shareholders of remuneration of executive directors in exact amount? 6%

Is disclosure made to shareholders of remuneration of non-executive directors in exact amount? 7%

Is disclosure made to shareholders of remuneration of top 5 executives who are not directors in exact amount? 2%

Is disclosure made of components of remuneration analysed by salaries, variable bonuses, options and long-term incentives? 75%

Singapore CG Awards 2006

Corporate Governance Practice – Audit Matters 2006(%)

Is the entire audit committee independent? 49%

Is the chairman of the audit committee independent? 95%

Do at least 2 members of the audit committee have accounting experience or related financial management expertise or experience 63%

Has the audit committee met with external auditors at least once annually in the absence of company management? 30%

Has the audit committee reviewed scope, results and effectiveness of audits? 44%

Has the audit committee met with internal auditors at least annually? 24%

Has the audit committee reviewed the independence of external auditors? 82%

Singapore CG Awards 2006

Corporate Governance Practice – Audit Matters 2006(%)

Was an annual review conducted of company’s internal controls and risk management? 64%

Does the annual report include a statement by the board on adequacy of internal controls, including financial, operational and compliance controls and risk management policies and systems established by management? 32%

Does the internal auditor report primarily to the chairman of the audit committee? 46%

Does the internal auditor meet standards set by recognised professional bodies (e.g. Institute of Internal Auditors)? 25%

Has the audit committee reviewed adequacy of internal audit function? 22%

What are the Current Problem Areas?

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 material particular and is 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?

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)

The Outlook for Corporate Governance?

Thank You!

Q & A

Presentation can be downloaded from www.cgfrc.nus.edu.sg

CGFRC Conference on “Reforming Governance in the Non-Profit Sector: Beyond Rules and Regulations”, 2 November 2006 [Riverfront Furama Hotel, only $50!]