28-Sep-11

Dr Tony TAN, CFA

Specially prepared for Singapore Management University

Tony TAN 2011

History & overview of corporate governance Introduction to corporate social responsibility Singapore code of corporate governance
History Principles

Types & roles of directors

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Tony TAN 2011

I What view corporate that I personally as governance a responsibility feel is Good isthat the I have not heard of any audit institutionalization of proper they and tell duty, youespecially what you as want a committee that discover of procedures and processes such that: to hear listed instead company. of telling People you any fraudof that appear in the the affairs the Company will what invested you in dont your want company to hear be conducted according to proper company, even on those recent and and the they least tell you you can the do good is to business, and ethical cases when legal actually there is instead be fair to ofthe theinvestors bad. If it by is principles; reports on the status of mis-representation of the the business are reliable, accurate, bad, being they transparent will tell you and 10% have of performance ofthe allboard the and relevant; and it. reasonably That is where good the corporate problem results! remains in control when decisions governance is. . on material issues, including major Dealer (Age 40+) Qian Hu (Age Corporation 50+) Limited
Dr Lee Boon Yang (Keppel Corp)
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business or investments, Male, ventures Foreign Exchange Male, Kenny Stock-Broker Yap are sought.

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Ronald COARSE Adolf BERLE & Gardiner MEANS Michael JENSEN & William MECKLING Eugene FAMA Eugene FAMA & Michael JENSEN

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PrincipalAgent Model

Cybernetic Analysis

Stewardship Model

Corporate Governance
Culture Theories Stakeholder Model

The most common theory used is that of the PrincipalAgent model

Resource Dependency Model

Political Model

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a contract under which one or more persons (the principal) engages another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent
Jensen & Meckling (1976)
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Due

to:

o Human self-interest o Risk aversion o Ineffective enforcement of contractual arrangements

Protection

through

o Governance structure o Design of optimal contracts

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The OECD Principles of Corporate Governance

"Corporate governance involves a set of relationships between a companys management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.

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Structuring, operating and controlling a company:

o Foundation of sound business ethics o Fulfilling the long-term strategic goals o Considers and care for the interests of employees, past, present and future o Work to maintain excellent relations with both customers and suppliers o Take account of the needs of the environment and the local community o Maintaining proper compliance with all the applicable legal and regulatory requirements under which the company is carrying out its activities.

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Responsibility, Accountability, Fairness & Transparency

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The importance of corporate governance

Corporate governance in recent times

Source: IESE

Source: odondo

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As we pursue our strategies world Iterms honestly believe the "In of power andthat influence A good company delivers wide, we accept a social and winning companies of this

you can forget about the church, environmental responsibility as excellent products and century will be those who forget politics. There is no more well. These responsibilities include services, and ain great prove with their actions that powerful institution society the promotion of a sustainable they can be recognition profitable and than business... The business company does all that economy and of theof business should not be about accountability we have to the increase social value and strives to make the economies, money, itenvironments, should be about companies that both do and well world awhere better place communities we do business responsibility. It should be about and do good around the world public good, not private greed."

William Ford Jr. Carly Fiorina John Smith Jr. Chairman Anita Roddick CEO & President Chairman & CEO Founder FordGeneral Motor Company Motors Hewlett BodyPackard Shop

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1950s. Howard BOWEN 1960s. Keith DAVIS 1970s. Committee for Economic Development 1980s. Philip COCHRAN 1990s. Archie CARROLL
The CSR firm should strive to make a profit, obey the law, be ethical, and be a good corporate citizen

Five Laws of Corporate Social Responsibility 1. Comes from social power 2. Two-way communication 3. Social costs & benefits to be considered before implementation 4. Social costs to be passed on to customer 5. Companies to be involved in certain social problems outside normal business operation

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Other names
o Triple Bottom Line; Corporate Sustainability; Corporate Citizenship; Social & Environmental Responsibility

No definite definition Changing parameters Strongly influenced by global trends and changes in international law
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Corporate responsibilities Human resource responsibilities Safety & health management Environmental management Supply and procurement Internal & external compliance Business ethics Long-term strategies Stakeholder relationship
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1. 2.

Human Rights
Right to collective bargaining Elimination of forced and compulsory labour Abolition of child labour Non-discriminatory practices

Protection of human rights Not complicit to human rights abuses

7. 8. 9.

Environment AntiCorruption

Precautionary approach to environmental challengers Greater environmental responsibility Be environmentally friendly

3. 4. 5. 6.

Labour Standards

10.

No corruption policies

The worlds largest corporate citizenship initiative

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10 principles imbedded within the corporation Reporting in annual report progress to meeting the 10 principles Publicly advocating the Global Compact and its 10 principles

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Board responsibility Risk management Performance measurement Sustainability reporting International guidance Independent verification

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Reduction in workplace accidents Increasing operational efficiency A happier workforce Improve branding & reputation Reduced liabilities Better access to capital

Source: developmentcrossing
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Everyones talking corporate social responsibility

Corporate social responsibility

Source: herecomestheboss.com

Source: FuquaSchOfBusiness

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1997

Formation of CFC

1998

Formation of SID

1999

Formation of SIAS

2001

1st code of corporate governance

2005

2nd code of corporate governance

2007

MAS/SGX takes responsibility for CG

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Source: MAS BACK

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BACK
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BACK
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Source: ACRA
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BACK
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A. Structure of code B. Disclosure requirement C. Board matters D. Remuneration matters E. Accountability and Audit F. Communication with shareholders

B. D. Disclosure A. Remuneration C. Structure Board requirement matters ofand matters code E. F. Accountability Communication with Audit shareholders Remuneration Independence Positive In the format confirmation committee from principles, Inclusion of a of whistle blowing substantial comprise guidelines of and shareholders NEDs with * Bundling provision of resolutions Explanation of deviation majority commentaries (including the NC to have more proactive Roles & obligations of chairman) being independent role external auditors Disclosure of exact & Chairman to be CEO Minutes of AGM be available remuneration of directors * separate persons to shareholders * * Not Not accepted accepted

BACK
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Source: MAS
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Description Total directors Female directors EDs NEDs IDs Board meetings Director fees Small cap Medium cap Large cap

2001 Code 1,704 111 (6.5%) 627 (37%) 297 (17%) 780 (46%) 4.2x $38k $32k $39K $52k

2005 Code 1,702 113 ( 6.6%) 563 (33%) 299 (18%) 840 (49%) 4.4x $53k $35k $47k $75k

Change -2 +2 (+0.1%) -64 (-4%) +2 (+1%) +60 (+3%) +0.2x +$15k (+39%) +$3k (+9%) +$8k (+21%) +23k (+44%)

Which industry had the largest fee increase?

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Principle
Lead & Control Responsible for the success of company Works with management Management accountable to board

Guidelines & Commentaries

Entrepreneurial leadership Strategic directions Financial & human resources Prudent & effective controls Review management performance Tone from the top Act in the interest of the company Disclosures of delegated authority Meet regularly and disclose attendance Set approval authority Formal letter explaining duties & obligations Appropriate training (especially first-time directors)

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Who sets the strategic direction of the company?

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Principle
Strong independent element Objective judgement No groupthink

Guidelines & Commentaries

One-third rule No relationship with company o Related companies (subsidiary or parent) or officers Past employee (3-years limit) Immediate family member Receiving other compensation Interested party transactions by substantial shareholder Board size Knowledge bank, constructive challenges Strategy development Set & review managements KPIs Meet without management

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What is independence & the right board size?

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Principle
Clear division of responsibility Balance of power & authority

Guidelines & Commentaries

Separate role o Agreed in writing o Disclosure of relationship Role of Chairman o Lead the board o Accurate, timely & clear information o Communication with shareholders o Bridge between Board & Management o Facilitate contribution of NEDs o Bridge between EDs and NEDs o Promote high standards of CG Appointment of lead independent director

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Which is better, combined or separate roles?

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Principle
Formal & transparent director appointment process

Guidelines & Commentaries

Establishment of Nominating Committee o Three directors, majority (including Chairman) independent Chairman not associated with substantial shareholders Responsible for: o Re-nomination (three-years appointment) o Determining independence of directors o Address multiple board representations o Selection of new directors Disclosures in annual reports of directors resume

How are directors appointed?

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Principle
Formal assessment process Board effectiveness Individual director effectiveness

Guidelines & Commentaries

Board evaluation to be undertaken by the NC Evaluation criteria decided by NC and used consistently o Relative benchmark against ST index and industry index Individual evaluation assess contribution and commitment. Include other indicators like RoA, RoE and EVA

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Should boards & directors be evaluated?

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Principle
Information to be: o Complete o Adequate o Timely Given: o Prior to meeting o On-going basis

Guidelines & Commentaries

Board to have separate independent access to senior management Information to contain: o Background o Financial information o Explanation of variances Board to have separate independent access to company secretary Board responsibility for appointment & removal of company secretary Ability of directors to take independent professional advice at companys expense

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What is information asymmetry?

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Principle
Formal & transparent procedure Director not involved in deciding own remuneration

Guidelines & Commentaries

Establishment of Remuneration Committee o Members are NEDs o Majority IDs Determine remuneration framework o Each director o CEO o Senior management Endorse by the entire board Seek expert advise if necessary at expense of company

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Are remuneration practices reasonable

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Principle
Appropriate to attract, retain and motivate Link between corporate and individual performance

Guidelines & Commentaries

Alignment of interest between EDs and shareholders NEDs remuneration should not compensate their independence Avoid excessively long service contracts and onerous removal clauses Avoid rewarding poor performance Use long-term incentive schemes with vesting element Caution when using relative comparisons Notice period should be set to six months

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Are firms rewarding poor performance?

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Principle
Disclose structure of remuneration policy To show link between pay and performance

Guidelines & Commentaries

Report remuneration of directors and top 5 key executives Reports in bands of $250,000 with relevant breakdowns Disclose remuneration if employee related to director/CEO and amount exceeds $150,000 Disclose details of employee share schemes

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Will disclosure of exact remuneration make a difference?

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Principle
Presentation of a balanced & understandable assessment Performance, position and prospects

Guidelines & Commentaries

This extends to all relevant public reports Management to provide this information

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How do you resolve information asymmetry problems?

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Principle
Establish an Audit committee Clear written terms & conditions Detail authority and duties

Guidelines & Commentaries

Annual Establishment meeting ofwith Remuneration auditors without Committee Management o Members are NEDs Annual o Majority review including of auditors Chairman independence be IDs Appropriate Whistle-blowing qualification considerations Report o Two of members ACs activities havein accounting annual report or financial experience Full resources to discharge its duties Scope and results of audit Independence & objectivity of auditors Integrity of financial statements Internal controls Internal audit function Appointment & removal of auditors

Are audit committees effective?

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Principle
Maintain sound system of internal controls Safeguard shareholders interests

Guidelines & Commentaries

This extends to: Financial Operational & compliance Risk management policies Other systems Effectiveness reviewed annually External validation done by independent person Commentary on adequacy of internal controls in annual reports

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Are auditors responsible for failures in internal controls?

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Principle
Independent audit unit

Guidelines & Commentaries

Direct reports to Chairman of AC Qualified o Standards for the Professional Practice of Internal Auditing o Institute of Internal Auditors Adequately resourced (in-house or external) Annual review by AC

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Should the internal audit function be internal or external?

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Principle
Regular Effective Fair

Guidelines & Commentaries

Address shareholders concerns Disclosure as descriptive as possible Avoid boilerplate disclosures Timely disclosure

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Are companies communicating effectively with shareholders?

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Principle
Encourage greater shareholder participation Allow shareholder communication

Guidelines & Commentaries

Participation and voting Avoid bundling of resolutions and to explain if used Presence of Chair of NC, RC and AC Presence of external auditors Allow for proxy voting Make minutes of AGM available

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Are shareholders needs met at AGMs?

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1997

Formation of CFC

1998

Formation of SID

1999

Formation of SIAS

2001

1st code of corporate governance

2005

2nd code of corporate governance

2007

MAS/SGX takes responsibility for CG

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14 proposed changes, two new principles & statement on The Role of Shareholders

Independence definition Board composition Directors training Multiple & alternate directorship Alignment of interest (including clawback clauses) Objectivity of remuneration consultants Detailed remuneration disclosure (directors & key management) Responsibility for risk governance Positive assurance statement Shareholder engagement policy Poll voting
Source: NewsSingapore
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Separation of ownership and management

Company managed by or under the direction of directors Except where shareholder approval is required

Statutory duties - A director shall at all times act honestly and use reasonable diligence
Act in the best interest of the company Avoid conflicts of interest Act for proper purpose

Effect of breach of fiduciary duties

Directors liable for any loss caused

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Section 157A of the Act states that the business of the company shall be managed by or under the direction of the directors. as including any persons occupying the position of director of a corporation
Companies Act (Cap 50, 2006 Rev Ed) s 4)

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1. Executive 2. Non-executive 3. Independent 4. Nominee 5. Alternate / substitute 6. Shadow 7. De facto 8. Associate 9. Chairman

2. 3. 1. Non-executive 4. Independent Nominee Executive director director director director 5. Alternate 8. 7. 6. Associate De Shadow 9.facto / Chairman substitute director directors director director See Director Appointed Active CG role Code with by in 2005 no an the operational appointer management -> and of Administrative Steps Directs Assumes Not regarded into the the shoes actions status as leader a of director of full ofof the adirector director the directors as board in responsibilities represents the company. their interest Law treats EDs, NEDs and IDs the time ( defined de jure of need in or the de facto Companies ) Act Usually o Undertook equipped function with casting that only vote a Many Appointer same Full-time reasons employee usually for this a person position with amay Not Directors No voting statutorily director acted rights can provided in unless do accordance consent for, but with Sets the board agenda large shareholding Provides Vigilant Paid in remuneration guardians independence ofassociation board (not of views fees) & be such given inhave instructions the articles of May also been terminated Chairs the AGM outside Common perspective in JVs and Oversight Contractual role position based on Practice Action Training is platform consistently appointed for at future applied the same possible over Actually engaged in the affairs of the parent/subsidiary companies See the CG Code 2005-> Balancing shareholder the election interests of time appointment ashide main to director the board Cannot under the cloak of company stakeholders Act as powers a role conduit for information and ignorance Generally include MDs and CEOs Same Control Similar the majority asas nominee main of director the director, board but to represent the interest of theon Supervisory function (CG code without rights and liabilities Not Role to of protect executive the director interest of -> May havereal Exercise limited influence powers in the appointor NEDs sitting in committees) minority shareholders, but all corporate Clarity in article affairs of ofassociation the company that May be not have liability if not involved May in conflicting situation Monitoring shareholders board and AD is not a director as commonly in thenot Does relevant apply decision toperformance professional between good for company or good strengthen leadership of board understood Appointment of-> lead independent advisers for appointor Boon or bane? See Higgs report -> director See diagrammatic representation -> Appointment to committees

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a. b. c. d. e. f. g.

Think the unthinkable Anticipate Murphys Law Grow a two-headed snake Practice Goldilocks management style Emphatise and inspire hope Have the skills of a juggler Put first principles first

Seven habits for a highly uncertain CEO

Back
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(1)
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Strategy. Challenge and develop strategy Performance. Setting and monitoring Risk. Accuracy of financial information, robustness of controls and systems of risk management People. Setting remuneration levels and management of senior management Attributes. Integrity, ethical, sound judgment, challenge & probing and strong interpersonal skills
Back

(2)
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No relationship with company o Related companies (subsidiary or parent) or officers Past employee (3-years limit) Immediate family member Receiving other compensation Interested party transactions by substantial shareholder

What do you think is the role of the independent director?

(3)
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Appointor: Substantial shareholder JV partner Investor Creditor

Shareholding/ Investment/ JV partner

Appoint

Company

Appointee: Employee Representative Director (4)

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Executive or non-executive positions Back

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(5)
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Lead the board Accurate, timely & clear information Communication with shareholders Bridge between Board & Management Facilitate contribution of NEDs Bridge between EDs and NEDs Promote high standards of CG

How is the Chairman of the Board decided

(9)
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