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Government Accepts Changes To Code Of Corporate Governance

14 Jul 2005

The Government has accepted most of the recommendations from the Council on Corporate Disclosure and Governance ("CCDG") in its recent review of the Code of Corporate Governance (the "Code"). This is part of the Government's on-going efforts to enhance Singapore's standing as a reputable and sound financial and business hub. The changes will take effect from Annual General Meetings held on or after 1 January 2007.

Review of the Code of Corporate Governance

2. The CCDG set up in May 2004 a Review Committee comprising private sector participants to review and improve the Code, taking into account international developments and feedback received since the Code was introduced in 2003. The CCDG consulted the public extensively, completed its review, and submitted its recommendations to the Ministry of Finance on 3 June 2005 for consideration (Please see Annex A for composition of the Review Committee, Annex B for the final report, Annex C for the letter from Chairman, CCDG to the Ministry, and Annex D for the Ministry's reply to Chairman, CCDG).

Key recommendations of the CCDG

Structure of the Code

3. To provide greater guidance to listed companies on how to implement best practices, the CCDG recommends that the revised Code should be structured as Principles, Guidelines and Commentaries. The Commentaries serve to elaborate on the Principles and Guidelines, and companies will not be required to disclose or explain deviations from the Commentaries. The Government accepts this recommendation.

Disclosure Requirement

4. The CCDG recommends that companies shall disclose, at the start of the corporate governance section of their annual report, that they have adhered to the Guidelines, and where applicable, identify and explain areas of deviation. To make it easier for companies, the revised Code will contain a list summarising the specific Principles and Guidelines for disclosure. The Government accepts this recommendation.

Board of Company Directors

5. Definition of independent director. The CCDG recommends tightening the definition of independent director to exclude directors who are, or directly associated with, substantial shareholders. The tighter definition of independence is to be applied to all the various board committees such as the nominating, remuneration and audit committees. The intention is to prevent potential mismanagement by excluding directors who may be influenced by any relationship with interested parties, and to ensure that no particular shareholder group's interests dominate. The Government does not accept this recommendation.

6. The Government agrees with the spirit behind the CCDG's recommendation and recognises the importance of directors' ability to think and act independently in ensuring the integrity of the board. However, the Government has decided, after much consideration, not to tighten the definition of independence beyond the current definition of independence from management and business relationships. The critical feature for directors to be able to exercise their duties effectively is independence of mind and independence from management, rather than independence from substantial shareholding per se. Substantial shareholders do not pose the kind of principal-agent problems that executive directors can potentially pose, and to equate them by treating both as non-independent directors would not be right. Substantial shareholders have a greater stake in the success of the company and their interests, more often than not, will be aligned with those of all the shareholders in the company. Furthermore, there are already sufficient provisions in the Companies Act on conflict of interests and related party transactions to safeguard against mismanagement by substantial shareholders or vested interests.

7. Tightening the definition will also deprive companies, especially those with substantial shareholders which are large establishments, the pool of talent from the shareholder companies which can enhance the quality of the directors on the board and committees of the companies. Given Singapore's relatively small and young economy, there is a limited pool of talent from which to draw keen and well-qualified directors.

8. While it is true that the CCDG's tightened definition of independent directors continues to allow substantial shareholders to fill up to two-thirds of the Board, the effects of the tighter definition will be keenly felt at the level of the various Board committees, such as the Audit Committee, the Remuneration Committee and the Nominating Committee as these committees require a substantial membership of independent directors. This could in turn lower the standard of corporate governance.

9. Ultimately, there is a risk that companies, especially the large companies and conglomerates, which find it unduly onerous to meet the tightened definition of independent directors proposed by the CCDG, may just decide to list their subsidiaries in alternative jurisdictions.

10. Composition of Nominating Committee. While the Government has decided not to tighten the definition of independence for the Board, the Government agrees with the CCDG that the Nominating Committee ("NC"), especially the Chairman of the NC, plays a particularly critical role in making recommendations to the Board on Board appointments, determining the independence of Board members, ensuring the transparency of the board appointment process, and assessing the effectiveness of individual directors and the board as a whole. Hence, the Government will require the Chairman of the NC to be independent of management, business relationships as well as independent of substantial shareholders.In determining a director's independence, the Government disagrees with the CCDG's recommendation that the NC cannot deviate from the Code when assessing the independence of a specific board member. The Government is of the view that the NThe Government accepts the CCDG recommendation as this will facilitate the participation of investors, especially institutional investors, at AGMs. This will also add to the sense of responsibility and accountability on the part of the board to al