Corporate governance: Get starting point right
by admin , April 23, 2010, 0600hrs
By Loh Chee Kong
cheekong@corporateobserver.com.sg
Anyone reading the newspapers in the past month or so could be forgiven for thinking that corporate scandals are rife in Singapore and companies here have a low standard of corporate governance.
First, the Monetary Authority of Singapore (MAS) announced that bank directors would come under greater scrutiny, with the default maximum tenure of independent directors capped at 9 years. Observers believe the new rules for bank boards will eventually become the benchmark for the Code of Corporate Governance — which is under review — for all listed companies.
This was followed in quick succession by the majority of Singapore companies faring poorly in the annual Governance Transparency Index (GTI) nd the Singapore Exchange (SGX) deciding to name and shame 10 former company directors who have breached listing rules.
For those who have been through boom and bust cycles, the story always repeats itself: In the aftermath of a bust, regulators around the world impose new controls and focus on the punishment and humiliation of swindlers.
As Mr Alex Pollock, resident fellow of the American Enterprise Institute for Public Policy Research, noted in 2006: “The purpose of corporate governance structures and practices is not only to reduce the incidence of financial fraud and scandal. However, this typically becomes the single-minded focus of corporate reforms in the period after a boom has turned to bust.”
In Singapore, it is not mandatory for listed companies to comply with the Code — drawn up in 2005 — but they are required under the Singapore Exchange listing rules to disclose their corporate governance practices and explain deviations from the Code in their annual reports.
The recent developments have already led to several businessmen lamenting that it would be harder to recruit independent directors (IDs) — meaning director fees have to go up — never mind the fact that they could lose a valuable asset at the end of every nine-year cycle, should the cap on bank IDs’ tenure be adopted for the Code.
The shortage of qualified people in Singapore has already resulted in several prominent corporate figures holding a staggering number of directorships, which ironically is also something that corporate governance advocates are unhappy about.
On paper, a default cap on the tenure of independent directors should force companies to constantly look for new blood.
But, in practice, the pool from which listed companies could draw potential directors from would be so small that these directors would end up playing musical chairs — if this is not already happening in Singapore’s corporate scene.
A BIAS AGAINST FAMILY BUSINESSES?
According to the latest GTI findings, only about a quarter of the companies have a majority of IDs on the board and a mere one-fifth have a non-executive chairman who is not related to the chief executive officer.
And only 6 per cent of the companies scored more than 50 points in an index topped by SingTel, which scored 103 points.
While Singapore cannot claim to be the model of corporate governance — at least by this Anglo Saxon-inspired yardstick — it is a country where corporate scandals are rare.
In a very different way, the results are telling: Singapore companies must be doing something right and the existing composition of most boards — while probably not ideal — is not entirely questionable.
Where corporate governance is concerned, there seems to be a wholesale, unquestioning embrace of Anglo Saxon-inspired concepts — including the separation of ownership (by shareholders) and control (by managers) — which did little to prevent some of the biggest corporate scandals and the recent financial crisis.
Among corporate governance advocates here, there also appears to be a bias against the family business structure, with the assumption that it does not encourage high standards of corporate governance.
Just because a director is a relative of the CEO does not automatically make him a less competent director — although curiously, blood lines seem to be the default test of a director’s independence here.
Yet the strength of well-run family businesses is exactly the fact that its decision-makers are united in pursuing strategies that are long-term and geared towards securing the future — in stark contrast to firms run by professional managers, where the tendency is to maximise near-term profits.
As proponents of family businesses would point out, such companies do not think in the short-term but in generations.
In fact, more could be done in Singapore to encourage family businesses — the model through which some of the biggest businesses in the world, let alone in Singapore, were born and nurtured. Think Walmart and United Overseas Bank (UOB).
A family business is not the anti-thesis of corporate governance.
In the same vein, why should the fact that a director holding a large stake in the company make him any less independent?
The existing Code deems a director not to be independent if he owns a 5-per-cent or more stake.
The world’s most savvy investor Warren Buffet probably knows a thing or two regarding the traits of a well-run company.
In his oft-cited chairman’s letter in Berkshire Hathaway’s 2003 annual report, Mr Buffet said: “The place to look for (IDs) is among high-grade people whose interests are in line with those of rank-and-file shareholders — and in line in a very big way ... The bottom line for our directors: You win, they win big; you lose, they lose big. Our approach might be called owner-capitalism. We know of no better way to engender true independence.”
As MAS managing director Heng Swee Keat noted when he announced in November the formation of the new council assigned to review the Code, the recent financial crisis had thrown up valuable pointers on corporate governance.
It would be worthwhile to relook its very definition and how it should be adapted to not just fit, but also build on the strengths of Singapore’s prevailing corporate and organisational structures.
With Singapore possessing a relatively good track record in corporate governance, it does not make sense that a majority of companies here have to revamp their boards in order to fit what is largely an imported standard.
Building a strong corporate governance culture is a long journey and we have to get the starting point right.
This commentary was also published in MediaCorp's TODAY newspaper.
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