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Basisofcorporategovernance
Corporate governance has been driven by many forces
acting together, namely;
The increased number of corporate scandals and their

size

ByKendhoo

Increased globalization and global capital flow


Differential treatment of domestic and foreign investors
The need to clarify ambiguities in the law or to require

companies to perform more than what is required by the


letter of the law
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Basisofcorporategovernance

Basisofcorporategovernance
The corporate codes developed under pressure from
the above problems in different countries were
different because the areas of emphasis were different

Making local entities to adopt the international best

practices
The fact that certain large organizations are dependent

on few individuals required codes that will protect the


rights of minority and other, less represented
stakeholders

For example the Kings report of South Africa was


more focused on the values of South African
community with an importance attached to religion

The

reduced stakeholder confidence in financial


reporting practices and a general increase in
involvement and awareness of the various stakeholder
especially government and institutional investors
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Principlesbasedapproach

PrinciplesbasedorRulesbasedCG?

In Singapore we have a principle based approach that is similar to the

UK code

One of the most important debates about the codes is


whether to make it rule based or principle based

The following characteristics of can be identified of a principles based

approach:

They sets out objectives rather than mechanism to achieve them

There is no one right answer to the question

Principles focus more on the soft areas of organization where rules

cannot be applied such as maintaining good relations with


shareholders, which cannot be quantified or monitored or enforced

It is dependent on the particular culture of the country


and the environmental demands

Principles are designed to be applicable over a wide range of

jurisdictions as the ultimate aim is to make the practices global

The enforcement is on a comply or explain basis

USA had to develop Sarbanes Oxley Act to cope with


the loss in confidence over auditing due to collapse of
Enron
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Principles based approach is mainly found in countries where the main

regulating body for companies is the stock market

AdvantagesofPBA:
They are applicable over jurisdictions

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DisadvantagesofaPBA
It can be vague and broad

It gives breathing space to new and emerging companies


They are broader, giving flexibility
It discourage a box ticking approach to CG
Some rules based approaches like the Sarbanes Oxley Act has

burdened small entities with costs that they cannot bear, but a
principles based approach is unlikely to be that burdensome

PBA is combined normally with disclosure requirements and is on a

comply or explain basis, stakeholders get a chance to make up their


own minds

Maintain capital and foreign investment flowing to the country. There

is evidence that after SOX USA stock exchange became less attractive to
investors and investees
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There can be confusion about what is required and


what is not
Comply or explain may be, theoretically used as a
getting away technique. Companies may consider it not
important to comply with the code because they may
consider it not binding
When they are enforced by the Stock Exchange, they
essentially becomes rules
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Rulesbasedapproach

AdvantagesofaRBA:
It is easier to monitor and enforce

While most countries follow PBA, some countries follow

RBA

There is no confusion as to what is required and not


required

They are characterized by:


More emphasis on mechanisms to achieve certain objectives
More focused on particular, observable issues such as board
composition
It is easier to monitor compliance because there is no leeway
from complying
Rules are obviously not going to cover all possible situations,
hence application by the book becomes judgmental at times
and is difficult for auditors and accountants
These are found in countries where the culture is more of
obeying the letter of law than of the spirit of principles
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There is no escape like comply or explain


It is focused and clear on particular issues

Disadvantages ofRBA

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HistoryofcodedevelopmentinUK

Inflexibility can be costly to companies

The development of corporate codes were in the form of various reports by committees that
were later combined together to make it a code by the stock exchange. It started in the UK and
the Singapore Code is an adaptation of the UK code

There will be areas not covered by the law and will not
be covered

Therefore we will look at the UK development process at first:


The Cadbury report (1992): relations between board and auditors
Greenbury Report (1995): disclosure for remuneration

It is said to encourage a box ticking approach rather


than an ethical approach

The Hampel Report (1998): clarified the principles laid down and recommended comply or

explain

Turnbull Report (1999): internal controls and therefore managing risks


Myners Report (2001): importance of proactive role of Institutional Investors
Higgs Report (2003): NonExecutive Directors
Smith Report (2003): Audit Committee
The combined code (revised) (2003)

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Greenbury Report (1995)

The Cadbury report (1992)


Themajorconcernswerethelackofconfidenceinfinancialreportingandthe

sorerelationsbetweenboardandauditors

Someoftheprovisionsofthereportwere:
Theboardcompositionwithindependentdirectorsandseparationofchairand
CEO
Importanceofregularboardmeetingsandthatmajordecisionsshouldbeleftto

theboard

The main concerns were about the directors pay and


gave a detailed disclosure for remuneration. It went
further than CR92 in that it recommended a
nomination committee of only independent
directors and the contract period to be only one year

Lengthofdirectorsservicecontractandtheneedtodiscloseremuneration
Importanceofauditcommittee
Financialstatementsshouldpresentabalancedandunderstandableassessmentof

theentity

Additionalstatementsshouldbemadeaboutgoingconcernandinternalcontrols

bythedirectors

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The Hampel Report (1998)

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Turnbull Report (1999)

This report was a follow up of CR92 and GR95 aimed at

clarifying principles laid down


This suggested a

comply or explain

Emphasized on the need for internal controls and


laid the responsibility of maintaining a proper internal
control system with the board
They are required to report on the adequacy of
internal controls in the yearly reports. This is also
indirectly to do with the responsibility to manage risk

approach in the most primitive form by requiring detailed


disclosure of departure and explanation of policies

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Higgs Report (2003)

Myners Report (2001)

This is one of the major reports after the combined code

This emphasized on the importance of Institutional


Investors to be proactive
It emphasized that II are in a position to make sure
that, especially under performing companies, are not
loosing shareholder value

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It supported the CC and recommended further changes to

the role of the independent director, their meetings


and disclosure of the issues
Some important recommendations are:
No one NED sit in all the three committees
NED should hold meetings as a group at least once a year and
disclose the number and attendance
Attendance of all Board meetings should be disclosed
Directors have the responsibility for succession planning
There should be a comprehensive induction program for the
NEDs
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Smith Report (2003)

The combined code (revised) (2003)

SR03 was concerned with the audit committee and


clarifying its role

All the reports from 1992 to 2003 were combined to


make the combined code

It was said that the role of the audit committee is to


provide an independent element within the board that
will protect shareholder rights in relation to financial
reporting and internal controls

However, combined code does not just combine the


provisions of the reports, but revises them

The audit committee does not have to do the testing


themselves, however should be satisfied that the
internal controls are working properly
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The Higgs report suggestion that one NED should not


sit in three committees, it said that over reliance
should not be placed on one individual

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CorporategovernanceinUSA:

CorporategovernanceinUSA
There are no principles that govern corporations in the
USA however there are laws that focus on specific
issues related to corporate life

TheENRONscandal
Enron, from outside, was a well managed giant company that made lots of

profits

However, when it collapsed, an investigation revealed lots of things:


Creative accounting and lack of transparency

There is no comply or explain basis

Ineffective corporate governance: the CEO was followed like a god and

conflicts of interest were every where

One of the most controversial of such laws was the


Accounting Industry Reform Act 2002 normally
called the Sarbanes Oxley or SOX

Inadequate professional scrutiny of external auditors, Arthur Anderson

went bust after this scandal

Insider trading at large scale, which was led by the information asymmetry

that existed. Employees and shareholders lost while insiders gained

Large executive compensation packages


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CorporategovernanceinUSA:

CorporategovernanceinUSA:

Governmentresponse

Governmentresponse

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Government of USA responded by submitting the Auditing Industry


Reform Act of 2002 to the congress

A significant limitation on nonaudit services came after SOX. Even if a

The main provisions of the Act were:


A requirement on all companies to file a periodic report with the
Securities and Exchange Commission
A new board called Public Company Accounting Oversights Board was
set up to regulate the auditing of companies
PCAOB has the right to set auditing, quality control, independence and
ethical standards for registered public accounting firms
The most important provision was S404, which required auditors to test
detailed tests on the internal controls as a part of the external audit. The
financial statements should contain internal control reports that it is
the responsibility of the management to maintain proper internal
controls. The auditor should test the effectiveness of the internal
controls and report

Rotation of audit partners in five years

service is to be provided it should be approved by the audit committee

Audit committee and auditors should have good relations and discuss

judgmental issues

All listed companies should have an audit committee


CEO and CFO should certify the appropriateness of the FS and that those FS

presents fairly the operations and financial condition of the issuer. If ever a
mistake had to be corrected, CEO and CFO will have to forfeit their bonuses

Off balance sheet transactions should be disclosed properly


Protection for whistleblowers in case of fraud

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CorporategovernanceinUSA:

CorporategovernanceinUSA:

TheeffectandCriticism

TheeffectandCriticism

There were effects on both companies and auditors.


While auditors got stripped off almost all the non
audit funds, companies had to incur costs on detailed
internal control maintenance and review
One international trend that evolved out of SOX is the
migration of investors from US to UK and other
countries where regulations are softer

There have been many criticisms of SOX:


Too rigid and too costly for small companies
Not being strong enough on issues of importance while

excessive on others, one soft spot not regulated is the process


of external auditor selection by the audit committee
Box ticking rather than the spirit of good governance
Comply or explain choice is not available
Movement of investment away from USA

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InternationalCorporateGovernanceCodes
There is an effort all over the world to harmonize
financial standards and corporate governance in order
to enable smooth flow of finance and capital cross
borders
Accounting Standards have been harmonized to a
great extent and this trend can be seen in the
Corporate Governance Framework too

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InternationalCorporateGovernanceCodes:

OECDguidance
Organization

of Economic Cooperation and


Development has defined a set of nonbinding principles
that can be used by international investors. The codes are
concentrated on the area of agency problem. Though some
ethical and environmental issues have been taken into
account, they are not central to the code
Some provisions include:
Equitable treatment of all shareholders
Shareholder right to information relevant and reliable, timely

and effectively
Take into account stakeholder other than shareholders

OECD guidance

Disclosure and transparency of relevant information

ICGN guidance

Fiduciary responsibility at its wider meaning of directors to

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the stakeholders, especially shareholders


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InternationalCorporateGovernanceCodes:

InternationalCorporateGovernanceCodes:

ICGNguidance
International Corporate Governance Network reported

in 2005

It is aimed at effective boards and hence competes properly

for the scarce capital

The major issues include:


Board: should be balanced and with a strong independent
element. Board should evaluate itself and directors should be
reelected every three years.
Shareholders: should be treated equally
Audit and accounts: it is important to have an audit
committee and proper disclosures
Ethics and stakeholders: relations with other stakeholders
and SEE guideline for CSR
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These international codes provide an important


consensus as to the importance of CG around the
world and can be applied over jurisdictions with
minimal costs
However there are limitations of such wide codes:
Not binding
Too wide
It cannot be strengthened because of the differences in
world cultures
They represent the lowest common denominator of
acceptable codes, not the best practice. This is the bare
minimum
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Roleandresponsibilitiesoftheboardofdirectors
Singapore code lays out the basic principle that there should be an

effective board that will lead the organization and take overall
responsibility for the success or failure of the organization

The specific roles of the board can be summarized as follows:


Leading the organization
Setting up internal controls and catering for risk management
Catering for the needs of the stakeholders and communicating with them
Laying out the strategies of the organization
Making sure that the management of the organization gets the necessary
resources to achieve the goals set by the board
Set standards and values to make up a good corporate culture that value
good corporate governance
All board members should attend meetings and keep records of the
attendance
There should be mechanism for the evaluations of the board members
Continual training of the members of the board and the induction of new
members properly
Fiduciary responsibility to shareholders (some may say stakeholders)

DetailedprovisionsoftheSingapore
CodeonboardMatters

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TwotierBoard

Onetierboardandtwotierboards
In Singapore we have one tier boards however in many
eastern European countries there are two tier boards.
The upper tier thus consists of the supervisory board
and the lower tier consists of the executive board

Twotierboard is a board that consists of two separate boards,


one being the executive board that has to deal with the running
of the organization and the supervisory board monitoring the
direction of the organization in general
Supervisory board has representatives from the shareholders and
the employees in it
They play the role of independent directors in a one tier board
Executive board has the executive directors who are involved in
the day to day running of the organization
They normally consist of managers at the top level of the
organization

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TwotierBoard

It is common in UK, USA and many other countries


The independent directors and the executives work in
the same board

Disadvantagesofthetwotierboard
Itislikelytobecostlier
Thesupervisorytierisremovedfromthebusinessandits
executives
Decisionmakingbecomesdifficultasmoreandmore
stakeholderswithconflictinginterestareallowedtoparticipate
Therepresentativesdoesnothavetobespecialistsorexperts,
hencereducingtheircontribution

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Onetierboard

Advantagesofatwotierboard:
Thereisastrongerindependentelement
Thereisfairrepresentationfromshareholdersandemployees
Thegapbetweentheboardsmakecollusionandconflictof
interestsminimal

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While the executives are given the general running of


the board, nonexecutives play the role of monitoring
the general direction of the organization

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Onetierboard

ThechairmanandtheChiefExecutiveOfficer

Advantages
Costsless
Thelessrepresentativeswehavelessconflictswehave
Nonexecutivesarerequiredtobeofhighqualityand
independent

The basic principle of corporate governance is that


power should not be concentrated in the hands of a
single person or a small group of people

Disadvantages
Thereisnorepresentationfromtheemployeesor
shareholders
Independentmaybecompromisedbyworkingtooclose
Independenceisnotapparentasinatwotierboard
Allcommitteeswillhavetobetakenoutofarelativelysmaller
board
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RoleoftheChairman
Chairman is the person who runs the board. He has a
pivotal role in making the board effective
He should be a person of personal charisma and ethics
The Code emphasizes the importance of this
separation by requiring any relationship between
chairman and CEO be disclosed

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ThechairmanandtheChiefExecutiveOfficer

ThechairmanandtheChiefExecutiveOfficer

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One step is to make sure that the chairmans role and


CEOs role are played by separate people

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Role of the Chairman


The roles as defined by the Singapore Code of a chairman include:
Making sure that the board members get relevant reliable information
on time
Keeping a good relationship with the executives and the NED
Monitoring the environment to say that everyone has a say in it
Making sure that there are ample number of meetings and that
attendance is taken
Leading the board and ensuring its effectiveness
Relationship between board and management
Relationship between board and the shareholders/stakeholders
Promote corporate governance
The Higgs report also suggested some more duties of the chairman:
Monitoring relations with the major investors
Ensure sufficient time for contentious issues
Induction of new directors and continued improvement of all directors
Ensure evaluation of the board
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ThechairmanandtheChiefExecutiveOfficer

ThechairmanandtheChiefExecutiveOfficer

RoleoftheCEO
The code does not specify many roles for the CEO
however gives the responsibility of running the
business to the executive directors

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Sizeoftheboard
The code says that the size of the board should be such that it
is possible to make effective decisions
Code does not prescribe a certain number but research has
shown that the average number of eight to ten is effective.
More than thirteen is seen excessive
The size of the board is an objective issue and should be
justified based on the operations of the company and the
need for directors
Balance
The code prescribes the composition of the board to be
balanced between age, expertise, duration of service, etc.

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Thekeyissuesregardingcompositionoftheboard

Thekeyissuesregardingcompositionoftheboard

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RoleoftheCEO
Some of the apparent roles thus would be:
Managing the resources of the business in the best interest of
the organization and its stakeholders
Building a team of experienced competent managers
Properly maintaining the internal controls of the
organization
Executing the strategies of the board, monitoring and
controlling the work
When in any circumstance the CEO and the chair is the same
person, a lead independent director should be elected. This
can happen when they have close family ties or are in the
executive team. The lead independent director would be
required to be available for shareholders to contact when the
CEO, CFO or chairman is not available or is inappropriate to
contact them

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Independentdirectors
Code strongly recommends that there should be a
strong independent element in the board
It prescribes onethird independent directors.
Independence is determined by looking at many
factors
It is said that a director should not have a relationship
with the company, a related company, an officer or
perceived to have a relationship with any of them
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Thekeyissuesregardingcompositionoftheboard
Independentdirectors
Some factors to look at when considering independence:
Employed by the company currently or in the past three
years
Immediate family member employed by the company whose
remuneration is determined by the remuneration committee
for the past three years
A director or immediate family member has accepted
compensation from the company in the past one year for
services except for services in the board
Director or family member being a substantial shareholder of
the company or its subsidiary (5% or more)
Director or family member is in the executive office of a
company from which or to which payments were received in
the current or past year. An amount of over $200,000 is
considered substantial. Payment is considered when favorable
conditions have been accorded and not retail, general
transactions
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If even with the above factors influencing


independence, a company may want to appoint him as
an independent director
Then the company should make a full disclosure of the
relationship and explain the reason behind the
decision

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The board should have, as a group, a balance of

TherolesofNEDs
Strategy:challengingcreativelyandconstructivelyto
thestrategiesproposedintheboard

competences such as accounting, finance and industry


specific knowledge

Board should meet regularly and is the chairmans

Risk:satisfyoneselfthattheproceduresforfacingrisk

responsibility to make sure that all directors are informed


of the meeting and that an agenda is prepared

arewelllaid

There is a requirement to disclose the attendance of the

Scrutiny/performance:monitortheprogressofthe

meetings, therefore there is a greater likelihood that all


directors will attend the meeting

managementinachievingtheobjectivesofthe
organization

Other than physical meetings, arrangements can be made

People:nominating,remuneratingandsuccession

for email, teleconferencing and other means of meetings if


the articles could be amended to change this

planning

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Independentdirectors

Boardskillsandmeetings

Thekeyissuesregardingcompositionoftheboard

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BoardPerformance

Accesstoinformation
The code says that it is the responsibility of the chairman to make sure

that timely and relevant information is made available to the members


of the board

The main principle is that board should evaluate itself on a


regular basis, whereby directors individually and the board as a
whole goes under rigorous, formal evaluation

The responsibility for producing such information lies with the

Board should approve an evaluation process that will be carried out

management of the organization; however, board should as a group


and individually should try and obtain information rather than
depending on what is being voluntarily produced

Some provisions of the code in this regard are:


Main information would be variances, budgets and forecasts and their
explanations
The company secretary should make sure that the information flow to

the board and should attend all meetings. He should be acting under
the guidance of the chairman

Directors should have independent access to external experts when

by the NC and this process should be disclosed

The NC would then set out objective performance criteria against

which evaluation can be carried out and these criteria should not be
changed until it is justifiable due to change in circumstances

Along with these performance criteria share price trends for the last

five years should be compared with the Strait Times index and peer
performance

Once the evaluation is complete, NC with the chairman should take

proper steps with regard to the find

there is a need on the expense of the company

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There are many ways in which evaluation could take place


One is an internal evaluation
In this case the board committees evaluates itself,

executives non executives and vice versa

Chairman and CEO are also evaluated


Like in Vodafone and in Marks and Spencer, the

performance is evaluated on an employee survey


There is no hard and fast rule as to the ways in which
performance is measures
An external review is the case where external consultants
are brought in, so that they will evaluate the board and its
members
Some companies prefer a hybrid where the elements of
both internal and external reviews are done

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BoardPerformance

BoardPerformance

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It is important to consider the finding of a research by a Yale

management school professor on corporate governance who said that it


is not the immediately apparent aspects of board performance that is
to be evaluated

It is the behavior and culture of the board that is to be measured


He emphasized the fact that Enron and WorldCom would have

passed with flying colors if a review of its apparent corporate


governance was evaluated

The culture in the board room and ethical values that govern the board

are more important

Some firms have taken these findings seriously and have started to take

these findings seriously

Like Cable and Wireless that conducts a wide range of meetings with

only nonexecutives, with CEO, with Chairman and with individual


directors
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BoardPerformance
Another problem is the outcome of such evaluation and

how they are dealt with

Legalandregulatoryissuesthatgovernthe
boardotherthanthecode
AspurportedbytheCityEquitableInsuranceCompanyLimited1925,

boardhasadutyofcaretothecompanyanditsshareholders

Sometimes such evaluations will be taken adversely and

can affect future performance

contractsofdirectors

Another more pressing issue is the fact that the disclosures

on these issues are very brief and are almost useless for the
users of information
However, of done well, evaluation of performance is likely

to give an insight in to the needs of the board to develop


and the need for immediate and continuous development
of the directors
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RetirementandrotationissuggestedbybestpracticeofCGwhere

directorssubmitthemselvestoreelectionandrenomination

Therulesarespecifiedintheconstitutionofthecompany:
AlldirectorsresignatthefirstAGM
AtsubsequentAGMsonethirdoftheDirectorsretire
Ifthevacancywasnotfilledinthemeetingthenhewillbedeemed
reappointedunlessitwasresolvednottofillthevacancyinthemeeting
ortheresolutiontoreappointwaslostinthemeeting
NewappointeeswillberecommendedbytheNCandshareholderswill
vote
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Legalandregulatoryissuesthatgovernthe
boardotherthanthecode
The reason behind the shorter service contract is the cost involved in

terminating a long contract even if it had to be

There are certain circumstances under which a director may be

disqualified under CA

If there is a conflict of interest we should disclose it and refrain from

voting

DetailedprovisionsoftheSingapore
CodeontheCommittees

Failure to do so may lead to disqualification or jailing of a director


Insider trading (the three types, giving information, trading,

persuading someone to trade) are prohibited

Martha Stewart went to jail for acting on information received from a

friend.

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Theauditcommitteeanditsrole

Theauditcommitteeanditsrole

Audit committee is a committee recommended from


the very beginning of the CG movement

It is covered in the Singapore Code as follows:


The board should establish an audit committee with at

The main objective of an audit committee is to protect


shareholder rights in relation to the financial
reporting issues

least three non executive directors majority of whom,


including the chairman, should be independent
At least two of the directors should have financial or

accounting backgrounds and experience

However this is not the only responsibility of the AC


Audit committee should have enough resources and should

have access to information and to the internal and external


auditing process
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Theauditcommitteeanditsrole

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Theauditcommitteeanditsrole

The roles of the AC can be:


They should be involved in the appointment, re appointment and removal of
external auditors
They should assess the independence of the external auditors at least once a year
They should evaluate the effect of non auditing services on the objectivity and
integrity of the external auditors
AC should provide a link between auditors and the board
AC should assess the effectiveness of the internal controls and the internal
auditing department
AC should meet with the internal auditors and external auditors without the
management every year
Audit committee should evaluate the work of the auditors, both internal and
external, as per the cost effectiveness
AC should test the adequacy of the internal controls laid down by the
management
AC should test the whistle blowing arrangement for the employees as per their
confidentiality and independence

We should note that there was a significant failure


from the AC of Enron which led to the sudden collapse
of the huge company. There could have been so much
done if they were responsible
One problem facing external auditors is the significant
amount of non audit income that leads to a threat to
the independence of the auditors, and AC should
monitor this effect

AC should make sure that the work done during the year and members of the AC

are disclosed in the annual reports

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Nominationcommitteeanditsrole

Nominationcommitteeanditsrole

The main principle is to make the nomination process


more transparent and selection of a board that is
necessary for the company, not for the existing
directors

The guidelines on nomination and nomination


committee as per the Singapore Code can be
summarized as follows:
There should be a nomination committee that

In Singapore the problem arose when Robinsons CEO


went searching for NEDs and public got the
information

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Nominationcommitteeanditsrole
TheroleoftheNCcanbesummarizedas:
Evaluatingtheneedsoftheboard,size,structureandconsidering
therequiredbalanceintheboardintherecruitmentprocess.The
requirementprocessshouldbedisclosedintheannualreports
Whenrenominatingadirectorconsiderationshouldbegiventothe
pastperformance
Makingsurethatdirectorssubmitthemselvestorenomination
everythreeyears
NCisresponsiblefortheperformanceevaluationthatweconsidered
inpartfourofthistext
NCshouldevaluatetheindependenceoftheindependentdirectors
everythreeyears
NCshoulddetermineifthedirectorsaregivingenoughtimeforthe
workinthecompany
NCshouldkeeparecordofthekeyinformationaboutthedirectors
andtheyshouldbedisclosedandupdated
ThereisaroleforsuccessionplanningfortheNC
Astatementshouldbegivenonitsactivitiesduringtheyear(Higgs
Report)
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at least three directors

comprises of
majority of
independent

whom,

with

the

chairman,

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Nominationcommitteeanditsrole
The board at Enron was an example of all the bureaucracy.

However appearances can be deceiving. The nomination


committee did not do its work and did not point out when
directors spent really a few minutes on issues
The compensation committee asked for documents from

company officials and when they did not provide them just
ignored the facts
Solomon brothers is a success story despite setbacks in the

past due to a rough trader, the board took corrective action


and the company survived and its 9000 employees did not
lose their jobs
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Riskcommittee

Riskcommittee
A risk committee is not recommended by the
provisions of the Code in Singapore
However many companies in practice appoints an
auditing and risk committee to extend the
responsibilities of the AC to include that of the risk
committee

The main areas of interest to the risk committee


would be:
Assessing and advising the board on procedures for
managing risk laid down by the board
Assessing the efficiency and effectiveness of the internal
controls both financial and non financial
Currency and interest risks may be another area of
interest in larger multinationals
Due to the type of work demanded from the RC, it is a
prerequisite that they be well versed in finance and
accounting

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Remuneration is considered a very important aspect of


corporate
governance
since
many
external
shareholders believe that directors are being paid
excessive remuneration and are also being paid for
failure
For this reason, the Singapore Code went on to
describe this matter in great detail

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Remunerationandthecode

Remunerationandthecode

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Codeonremunerationcommittee
There should be a formal and transparent process for
remuneration of directors
No director should be involved in the decision of their
own remuneration
A remuneration committee consisting entirely of
NEDs should be selected, majority of whom, including
the chairman, should be independent. [Higgs report
says that the remuneration of NEDs is a problem for
EDs]
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Remunerationandthecode

Remunerationandthecode

Code on remuneration committee


The RC will recommend a broad framework for
remuneration and detailed remuneration packages for
each director
They should be approved the entire board

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Code on the level of remuneration


Remuneration of directors should be so as to retain, motivate
and attract qualified, experienced people
It should not be excessive
There should be a part of the pay which is related to performance
(the best practice is to make this part more than the others, but
Singapore code stops at this). The performance related part should
be designed in such a way to align interests of the shareholders and
the agents
NEDs should not be excessively paid so as to compromise their
independence
Service contracts should not be excessively long or with onerous
removal clauses. The notice period should be six months
Long term incentives are encouraged. It is a good thing to vest the
long term benefits so that a small amount can be realized every year
In setting remuneration, we should cautiously use the data from
peers and comparable competitors

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Remunerationandthecode

Code on disclosure of remunerations


The level, mix and policy for remuneration should be
disclosed
It should enable users to identify the relationship between

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Otherissuesregardingremuneration(notfrom
thecodebutbestpractice)
The key elements of directors remuneration
Base salary that is specified in the contract which has no relation to the

performance

performance and pay

Account related bonuses

Remuneration of the directors and top five executives who are

not directors should be disclosed in bands of $250,000 and


should be broken down into base salary, bonus etc

Share options giving the right to purchase shares at a specified time

It should also disclose if there is a particular immediate family

Restricted share options where the transferability is restricted to a few

member of a director in the business that gets more than


$150,000 per year in bands and in percentage breakdowns

normally attached with performance criteria. There is debate as to the


effectiveness of these criteria
years

Pensions

there should be a disclosure of other issues such as share

options and employee share schemes

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Benefits in kind
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Problemswiththeremunerationcommittee

Problemswiththeremunerationcommittee

There are problems with the current remuneration


committee arrangements

The problems arise due to many factors:


RC is actually selected by the board and it is obvious that the

Those excessive pay schemes that are being criticized


over the media are actually ones that have been set by
independent remuneration committees

board will have an influence on them


RC consists of NEDs that are EDs in other companies. By

setting difficult objectives they are making their lives difficult


at their actual boards
There is a general tendency whereby RC will not set

excessively low pay levels for EDs in comparison with their


counterparts in other companies. As time passes there is a
gradual increase in the remuneration of all companies. This is
what we have been seeing though this is just the opposite of
the objective behind selection of RC
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Settingperformancecriteriaandtheproblemswiththem

Settingperformancecriteriaandtheproblemswiththem

There can be three main types of performance criteria


set by RC. Those related to the accounting profit, those
with the market performance, those with the
benchmarking of peers and individual performance
measures

There has been much discussion over improvement of


these performance measures:

The problem is that, directors serve for a short period


and they have to be evaluated on short term
indicators, which is in stark contrast to the long term
value adding objective of the stakeholders of the
company. Some of the most widely used performance
measures such as profit before interest and tax can
encourage careless behavior, for example high gearing
levels
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Some have suggested the removal of corporate share

option schemes and replacing them with a generous


salary and 5 years restricted shares
Share incentive schemes like the one above may be

encouraged on the executives and employees but should


not be given to NEDs because that can give them an
unhealthy focus on share prices of the company in the
short term (and may not consider other factors, they are
also human beings for Gods sake!)
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Otherissues

Otherissues

Golden goodbyes must be eliminated and large


payments for just retaining directors in the name of
continuity should be eliminated. It is like rewarding
performance
Golden goodbyes can be minimized by:

NEDs remuneration should be determined by the


executives where it is allowed by the Articles or by
shareholders in a general meeting

The remuneration should not be so excessive to


compromise independence of NEDs

Change in notice period as purported by the code


Contract changes whereby benefit is paid until they find
another employment
Removal payments can be made by a fixed number of shares
in the company

As mentioned before it is not good to remunerate


NEDs with share options

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