Independent directors (IDs) on the boards of listed companies (listcos) here may soon face hard caps on their tenure as part of a set of refined corporate governance rules that the Singapore Exchange’s (SGX) regulatory arm plans to introduce.
Singapore Exchange Regulation (SGX RegCo) wants listcos to disclose their directors’ and CEO’s remuneration. In a media briefing, its CEO Tan Boon Gin warned of these two “concerning trends” following a review of such disclosures by KPMG in Singapore, adding that he is “quite disappointed” with companies here.
Since January, listcos have had to implement two-tier voting to retain IDs beyond nine years. After seeking approval from all shareholders, the second vote excludes shareholders who also serve as directors or CEO of the company and their associates.
Tan says SGX RegCo had expected companies to use the two-tier vote “sparingly” to retain quality independent directors beyond nine years. “Instead, we saw a rush to use the two-tier vote to retain long-serving directors despite cautioning against this.”
Citing a Nanyang Business School study, Tan adds that 70% of 391 long-serving IDs seats for re-election were put to the two-tier vote. Even for the 172 long-serving ID seats not due for re-election, 73% were re-elected via the two-tier vote.
He explains: “If this is allowed to continue, we may not be able to achieve the renewal and diversity outcomes that we seek. It is therefore timely for SGX RegCo to consult on hard-coding the nine-year limit for independent directors.”
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In addition, remuneration disclosures among listcos remain poor, notes Tan. “Companies argue that remuneration details should be kept vague for competitive reasons. But the information is important for understanding the link between business performance and financial rewards.”
In a Sept 13 press release, SGX RegCo says it believes remuneration details of directors and CEOs should be transparent as they have a fiduciary duty. “The question of competition is less of a concern.”
Tan says the proposed disclosure level will be an exact dollar value. While many companies are happy to give the breakdown of what constitutes the total compensation in actual percentage terms, they prefer to keep the compensation disclosures vague at bands of $250,000 each.
“As for the directors’ feedback, we are open to hearing from the market. In terms of what was the tipping point for us, it’s the liberal use of ‘competitive reasons’ for explaining non-disclosure for directors and key executives. We feel competitive reasons are a much less compelling argument regarding directors.”
SGX RegCo’s announcement comes weeks after the Monetary Authority of Singapore (MAS) fined Noble Group $12.6 million for misleading financial statements, ending a 45-month probe into the collapse of the Hong Kong-based, Singapore-listed commodity trader.
Two former directors of its Singapore-based subsidiary, Noble Resources International, were given “stern warnings”. The names of these two directors were initially kept confidential in the Aug 24 announcement. In response to media queries, it was only a week later that they were named: Neil Timothy Dhar and Timothy Martin Eyre.
Until 2015, Noble was a fast-growing commodities player poised to join the likes of Glencore in the big leagues. When Noble caved and defaulted, its share price collapsed by 99%. In 2018, it was delisted from the SGX.
Asked if the new recommendations directly result from Noble’s demise, Tan says he would “rather focus on the forward”. He adds: “What we’re doing today will enhance board independence. It will increase transparency and improve corporate governance. So, I think we’re taking steps to make listed companies harder targets for corporate malfeasance in the future.”
In the disclosure review, KPMG evaluated annual reports and company websites of 585 listed companies whose financial years ended between July 1, 2020, and June 30 last year, based on the 2018 Code of Corporate Governance.
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About half the companies disclosed that they had IDs serving beyond nine years, and 24% of directors surveyed believe a hard limit of nine years should apply to IDs.
Most companies continued to report the remuneration of directors, CEOs and key management personnel in bands. Only 35% and 18% of companies disclosed director and CEO salaries in dollar value, respectively.
Based on the findings, the Corporate Governance Advisory Committee (CGAC) recommends that SGX amend its listing rules to introduce a hard tenure limit on IDs and mandatory remuneration disclosures of each director and CEO.
Established by MAS in February 2019, the CGAC advocates for good corporate governance practices.
The CGAC recommends that IDs who serve more than nine years should no longer be considered independent. “This does not preclude a director from continuing to serve on the board after nine years, albeit as a non-independent director. The CGAC further notes that tenure restrictions on IDs have been imposed in other jurisdictions such as the UK, France, India and Malaysia.”
The CGAC believes shareholders deserve clearer visibility of companies’ remuneration structure and director and CEO remuneration practices. “The CGAC notes that such disclosures are required under the law or the listing rules in other jurisdictions such as the UK, Australia, Hong Kong and Malaysia.”
Automatic sustainability reports
As part of an overall push for better governance, SGX and MAS also launched ESGenome — a digital disclosure portal that helps listcos generate sustainability reports.
From Sept 12, companies can use the portal for baseline sustainability reporting based on 27 SGX core environmental, social and corporate governance (ESG) metrics. SGX arrived at the 27 core metrics last December after reviewing the most common data points in companies’ sustainability reports — a compulsory annual document for listcos since 2016.
On the free-to-use ESGenome, companies input data for each ESG metric just once. The platform will automatically map the data across globally recognised ESG reporting standards and frameworks, such as the Global Reporting Initiative (GRI), Task Force on Climate-Related Financial Disclosures (TCFD) and more. ESGenome is a Software-as-a-Service (SaaS) solution operated by UK-based company World Wide Generation.
Companies can also make additional disclosures across more than 3,000 ESG metrics, depending on materiality and business needs.
Once ESGenome achieves a “critical mass of data” from listcos, investors can access comparable sustainability reports across companies, says Chan Kum Kong, SGX Group’s managing director and head of research. “In an ideal world, these metrics should be readily available, much like financial statements currently, because there will be consistency and comparability.”
Speaking at the media conference, Chan says developing the platform took more than a year. SGX also held a four-month pilot with more than 40 participating listcos like Singapore Telecommunications (Singtel), CapitaLand Investment, Lendlease Global Commercial REIT, First REIT and OUE Lippo Healthcare.
SGX expects climate-related disclosures from listcos for FY2022 on a “comply-or-explain” basis. While SGX does not expect every company to use ESGenome for their sustainability reports, Chan says regulators are considering making the portal mandatory for listed companies.
However, SGX is mindful of the cost of data collection. “What’s very important in any one of these exercises, we have to make sure that the cost is optimised. We have to stage it in a manner where companies will be able to acclimatise,” says Chan.
ESGenome is one of the four digital platforms in MAS’s Project Greenprint, a joint effort with the local bourse to simplify, standardise and improve corporate disclosures. The eventual goal is for all companies here — or “Singapore Inc” — to use the platform, says Chan. “If Singapore [companies] can provide that, then the network effect of the information and the data provided is quite powerful and effective.”
MAS will draw on the learnings from ESGenome to address the reporting needs of the broader universe of corporates, notably small and medium-sized enterprises (SMEs) and supply chain partners and suppliers. With comparable data, for example, SMEs could submit green loan applications with ESGenome’s reports, says Chan.
SGX and MAS are footing the bill for developing and maintaining the platform. While Chan declined to reveal the project’s cost, he notes that “at some point, it needs to have a self-sustaining angle”. “We will look towards some of the analytics downstream to see how we can have a revenue line to this.”