Changes to make firms more accountable

Following an 18-month review of the code of corporate governance, prompted in part by global events such as the 2008 global financial crisis, sweeping reforms are on the way to shine more light on how firms are managed while making bosses and directors more accountable to their shareholders.

The 15 key proposed changes unveiled by the Corporate Governance Council extend into all areas of a company's operations, from pay and risk management to the role of independent directors and ways to ensure that the books are kept to the highest standards. The watchword is scrutiny - of the board, the bosses, the risks they take and the remuneration they dish out. The corporate governance code is not enforced by law but there is a section devoted to it in every listed firm's annual report. Companies which do not comply with parts of it must explain why.

Singapore firms seem to perform well in this area. A study of 280 annual reports by consultancy Freshwater Advisers found that 80 per cent of these listed firms had complied with the code in key areas, such as directors' pay, last year. Council chairman, Mr Alan Chan said: 'This effort is critical to maintaining investor confidence and to enhance Singapore's reputation as a leading and trusted international financial centre.'

Among the key changes is a proposal to strengthen a board's independence by tightening the definition of an independent director. Those who are substantial shareholders or linked to them, as well as those who have been directors continually for more than nine years, will be barred from serving as independent directors. The council also wants independent directors to comprise at least half of the board - up from a third now - in certain situations, for instance, if the chairman is also the chief executive. It is also putting the onus on a company's nominating committee to decide if a director is able to carry out his duties adequately once all his other directorships and commitments are taken into account.

The council, with an eye to protecting shareholder interests, wants the board to be responsible for a firm's 'risk governance' and to determine the kind of risks it may undertake. It recommends that the board state if it has received assurances from management that the financial records are complete and accurately reflect the company's operations. Directors should also confirm if an effective risk management system has been put in place. The board should comment on whether it gets assurance from the chief executive and the chief financial officer that the financial records have been properly kept.

More transparency looks likely on the contentious issue of how a company rewards directors and top managers. The council wants firms to consider contractual provisions that will allow them to claw back the 'incentive component' of remuneration if financial irregularities or misconduct brings about a loss.

Rather than asking companies merely to state the remuneration of each director within bands of $250,000, the council wants full disclosure on how much a company is paying the chief executive and each director. Some of the proposed changes require:

• directors and key management to be subject to pay claw-backs if financial results are misstated or if there is misconduct that leads to a financial loss;
• consultants reviewing pay should not enjoy a 'special' relationship with management which may compromise their independence and objectivity;
• more disclosures on the link between pay and performance of top brass.

Industry leaders, academics and the investment community say the proposed changes to the Code of Corporate Governance will bring it in line with international best practices.