Regulatory authorities are looking to strengthen rules around board independence and CEO disclosure, reports Tim Human
Tighter governance rules could be on the way for Singapore’s listed firms. In mid-September, Singapore Exchange Regulation (SGX RegCo), the city’s financial watchdog, proposed two changes to the existing regime: a hard limit of nine years on the tenure of independent directors and mandatory disclosure of the exact salaries received by the CEO and directors.
The proposals have now been put to a public consultation. Ahead of the results, however, should companies start preparing for change? And how aligned are the new rules with institutional investor expectations?
Director debateSingapore’s regulatory authorities have been tussling with different ways to improve board independence and diversity for years. As part of this drive, a new governance code was introduced in 2018, although some of the tougher elements didn’t come into effect until the start of this year.
Among these changes, Singapore introduced a hard limit of nine years on the tenure of independent directors, but also provided flexibility to hold on to the most important individuals through a ‘two-tier’ vote. Under this system, long-serving independent directors who want to retain their independent status need to pass two votes: one covering all shareholders and the other covering shareholders minus the chief executive, directors and their associates.
Rather than start to phase out independent directors with nine-plus years’ tenure, however, many Singaporean companies have chosen to use the two-tier vote to maintain the status quo.
Over the summer, KPMG Singapore published a review – commissioned by the regulator – to investigate how companies were adapting to the new governance code. It found 48 percent of issuers continue to have at least one independent director with a tenure of more than nine years, while 27 percent have two such directors.
What’s more, a separate study by Victor Yeo, an associate professor at Nanyang Technological University, notes that more than two thirds (68 percent) of long-serving independent directors were re-elected via the two-tier system.
Dashed expectations‘We expected companies to use the two-tier vote sparingly to retain quality independent directors beyond nine years,’ says Tan Boon Gin, CEO of SGX RegCo, in a statement. ‘What we saw was a rush to use the two-tier vote to retain long-serving directors despite us cautioning against this.’ As a result, Tan says the regulator would ‘consult on hard-coding the nine-year limit for independent directors’.
Alongside KPMG’s study, SGX RegCo conducted a survey of company directors to get their views on governance issues. The majority (57 percent) said they thought the current two-tier system was ‘appropriate and sufficient’, while only 24 percent felt the nine-year tenure limit should be hard-coded.
Kainoa Blaisdell, vice president at advisory firm Teneo, questions whether a hard limit on independent director tenure would benefit a company’s stakeholders. ‘A narrow focus on tenure could discount the value a good independent director can bring to the board and the company,’ he tells IR Magazine.
‘Is the opportunity cost of removing a valuable independent director because of his or her extended tenure commensurable? What is needed is perhaps a clearer system of enforcement powers that rewards accountability and competency, as well as punishes failures to behave independently and responsibly.’
Whatever the outcome of the consultation, Blaisdell suggests companies look beyond the issue of director tenure and think about what skills their board needs. ‘Board diversity is particularly relevant in today’s fast-evolving world to ensure the board helps management look out for business blind spots,’ he says.
‘Rather than worrying only about the tenure of your independent directors, think about the gaps you need to bridge to future-proof your business and build competitiveness. If that means introducing a digital quotient to your board in order to accelerate the digitalization journey, the priority should be to prospect the right talent.’
We expected companies to use the two-tier vote sparingly to retain quality independent directors beyond nine years
Pay transparency The other area Singapore’s regulator took aim at in its September statement is executive compensation. SGX RegCo calls the current level of disclosure ‘poor’ and argues that competitive reasons are not enough for companies to obscure the amount earned by the CEO and directors.
Referring to findings from the KPMG review, SGX RegCo notes that just 35 percent of companies report director compensation in dollar value, while the figure is 18 percent for CEOs. It adds that disclosure on remuneration tends to be ‘high level’ and often ‘does not explain how remuneration, performance and value creation are related’.
‘Companies argue that for competitive reasons, remuneration details should be kept vague,’ Tan says. ‘But the information is important for understanding the link between business performance and financial rewards. SGX RegCo is of the view that remuneration details of directors and CEOs should be transparent as they have a fiduciary duty and the question of competition is less of a concern. We will therefore be consulting on requiring the actual remuneration of directors and CEOs to be disclosed.’
Disclosure debateIn contrast to the regulator’s view, Blaisdell argues that the rationale for non-disclosure is ‘well argued and articulated’. ‘Many senior executives across the Asia-Pacific region are uncomfortable disclosing all aspects of their compensation, so this proposed change will face strong inertia from the business community,’ he says.
He suggests that, rather than focusing on CEO remuneration disclosure, companies provide more information about the structure of the compensation and how it is aligned with stakeholder interests. ‘A CEO who has incentives pegged to the company’s profitability, share price performance or ESG outcomes – as we have seen more of in the US – would be well aligned with minorities in terms of stakeholder value creation,’ he explains.
SGX RegCo’s director survey underlines the discomfort many serving board members have with full pay disclosure. Just 8 percent of the 474 respondents say they would support the disclosure of exact numbers on a named basis. The most popular response, selected by 32 percent, calls for a continuation of the current approach where key personnel reveal salary data in bands only.
Blaisdell notes that institutional investors don’t appear to be significantly concerned about the issues of independent director tenure and compensation disclosure at the current time. ‘Until we see proxy fights and shareholder activism campaigns on these issues being initiated during AGM season, it is fair to deduce that these issues are not getting on the nerves of institutional investors yet,’ he says.
