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Opening Address By Minister For Finance, Dr Richard Hu At The Third Asian Roundtable On Corporate Governance On 4 April 2001 At 9.00 Am At The Shangri-La Hotel, Singapore

04 Apr 2001

Good morning Mr Kondo, Mr Fremond, Mr Shin, distinguished guests, ladies and gentlemen,

1. I am pleased to be here with you this morning at the Third Asian Roundtable on Corporate Governance.

2. I would first like to thank the OECD, the ADB and the World Bank for organising this Conference. I would also like to extend a warm welcome to our overseas guests, and thank all of you for contributing to this worthy effort. Your presence attests to the importance of the issues we are here to consider.

3. Singapore's participation in OECD activities has increased in recent years. Since 1999, Singapore has been an observer in the OECD, participating in the Committees of Trade, Financial Markets and Information, Computer and Communications Policy. Last year, we joined the Insurance Committee as an observer. We have benefited from the exchange of views and experiences in these OECD committees. It is now an honour for Singapore to host the Third Asian Corporate Governance Roundtable.

The Role of Boards and Stakeholders in Corporate Governance

4. The theme of this year's Roundtable is 'The Role of Boards and Stakeholders in Corporate Governance'. This theme reflects two of the five OECD Principles of Corporate Governance. It recognises the importance of the Board in corporate governance, as well as the role of stakeholders and how the interests of stakeholders can be appropriately recognised.

5. The accountability of the Board to the company and its shareholders is a basic tenet of sound corporate governance everywhere. Besides guiding corporate strategy, the Board is chiefly responsible for monitoring managerial performance, and balancing competing demands on the corporation. It also has responsibility for assuring the integrity of accounting and reporting systems of the company.

6. The Board, in particular the independent directors, plays a significant role in areas where the interests of management, the company and shareholders may diverge, for example, in areas such as executive remuneration, changes of corporate control, take-over defences, related-party transactions and the integrity of the audit function.

7. A company's competitiveness and ultimate success is often the result of many factors at play, including contributions of the various stakeholders. The governance framework should thus recognise that the interests of the company are served by recognising the interests and contributions of the various stakeholders. In many countries, essential stakeholder rights have been established by legislations, such as labour laws, environmental laws, contract laws, and insolvency laws.

8. There is increasing evidence to show that investors will pay a premium for better governance. In an Investor Opinion Survey conducted by McKinsey, World Bank and the Institutional Investor magazine last year, 89 percent of respondents in Asia said that they would pay more for the shares of a well-governed company than for those of a poorly governed company with comparable financial performance. The actual premium that they are willing to pay for a well-governed company can range from 18 percent to 27 percent, depending on the country in question. In particular, 77 percent ranked board practices to be at least as important as financial issues in stock selection.

9. Companies with good corporate governance are likely to be more resilient during market downturns.Those with weaker governance see their share price collapse when market turmoil resulted in a higher discount for mismanagement. Transparency, accountability, independence, fair treatment of shareholders, management discipline and responsibility - all of which are key factors of good governance - play a crucial role in investor decisions.

Singapore's Efforts in Improving Corporate Governance

10. Singapore has escaped relatively unscathed and recovered quite quickly from the Asian crisis. But we know that we must not rest on our laurels. Despite being ranked first for corporate governance in a recent Credit Lyonnais report1 among 25 emerging markets, I believe the corporate governance standards in Singapore are still not yet comparable to those in the leading jurisdictions, such as the US, UK and Australia.
1 CLSA Emerging Markets Equities Research on Corporate Governance,
'The Tide's Gone Out: Who's Swimming Naked?', October 2000.

11. We decided three years ago to implement a wide-ranging series of liberalisation programmes in Singapore. We did so despite the Asian crisis, and in some areas, specifically because of the lessons learnt from the crisis. We know that had our local institutions and companies not geared themselves for change and competition, they would have lost an important opportunity to remain viable in the new global environment.

12. We have introduced a series of initiatives to boost the competitiveness of our financial sector. They include the merger of the cash and derivatives exchanges to form the Singapore Exchange and programmes to liberalise the banking, securities and insurance industries. One of the most significant changes in our regulatory regime is the move from a predominantly merit-based regulatory framework towards a disclosure-based philosophy of regulation. Under the disclosure-based regime, the merit of transactions will be largely determined by investors, based on information disclosed by companies. This not only changes the role of the regulators, but it also requires fundamental changes in areas such as our legal and corporate regulatory framework, accounting and disclosure standards, codes of best practices, and the active participation of private-sector participants such as the media, professional bodies and investors' associations.

13. As our aim is to enhance Singapore's position as an international financial centre, we recognise the need to further upgrade our corporate governance, disclosure and accounting practices so that they are of world-class standards.

14. With this in mind, the Ministry of Finance, together with the Monetary Authority of Singapore and the Attorney-General's Chambers, set up three private-sector-led committees last year to review the corporate regulatory framework, disclosure and accounting standards and corporate governance practices in Singapore. These Committees will report their findings and make recommendations to Government.

15. One of these committees, the Company Legislation and Regulatory Framework Committee, is reviewing Singapore's corporate law and regulatory framework, to align our corporate law with the best practices in leading jurisdictions. It will seek public feedback on its interim proposals. The committee can only complete its study after the issues under the other two committees are settled.

16. A second committee, on Disclosure and Accounting Standards, has reviewed the processes by which accounting standards are set, maintained and regulated in Singapore. It has also studied the approach, development and promotion of best practices in disclosure requirements among listed companies. The committee will be posting its second consultation paper on the Internet for further public comment, before it finalises its report.

17. The third committee, the Corporate Governance Committee, or CGC for short, has completed its review. The Committee has submitted its report, proposing a Code of Corporate Governance for listed companies in Singapore, which sets out recommended corporate governance principles and practices. I am pleased to announce that the Government has accepted all of the CGC's recommendations. Here, I would like to thank the Chairman, Mr Koh Boon Hwee, Chairman of Singapore Telecommunications Ltd, and members of the Committee for their good work in helping to raise the level of corporate governance in Sin gapore. Listed companies will be required to disclose and explain deviations from the Code in their annual reports for Annual General Meetings held from 1 January 2003 onwards.

CGC's Recommendations

18. The CGC was formed in January 2000, comprising mainly private sector members with wide-ranging experience and expertise. In December last year, the Committee conducted a public consultation to seek feedback and ideas from stakeholders on its preliminary views. The consultation attracted widespread interest and received many commentaries and suggestions.

19. Acknowledging that there is no 'one-size-fits-all' solution, the CGC does not recommend strict compliance with the guidelines. Each Board is left to implement the principles of the Code in ways which make sense in their particular circumstances and which carry the support of their shareholders. However, listed companies will have to disclose their corporate governance practices and explain any deviations from the Code.

20. Many of the CGC's recommendations are already being practised by companies in Singapore and other countries. Nonetheless, it is good to formalise these best practices into a set of principles and guidelines to serve as a model and benchmark for all companies to follow. Let me now briefly touch on each of the four major areas in the Singapore Code of Corporate Governance and the recommendations of the CGC in each of the areas.

Composition of the Board

21. At least a third of the Board should be independent to provide a certain degree of independence from Management. Companies may go beyond this and have a majority of its directors independent, but it is for them to decide what is best for the company. In addition, a Nominating Committee should be established to provide a formal and transparent process for the appointment and re-election of directors.

Remuneration Matters

22. Every listed company should set up a Remuneration Committee to provide objectivity in remuneration-setting. The Code also requires greater clarity on the principles of compensating executive and non-executive directors, so that the remuneration of directors and senior executives would better reflect their performance and contributions to the company.

Audit and Accountability

23. The Audit Committee should be made up entirely of non-executive directors, to ensure independence and objectivity. This recommendation represents a departure from current practice whereby an executive director can be a member of the Audit Committee. In addition, the CGC recommended that at least two members of the Audit Committee should have accounting or financial management expertise or experience, so that it can effectively discharge its responsibilities.

Communication with Shareholders

24. The principles and guidance notes in this section seek to encourage companies to engage in more effective communication with shareholders. The results of a survey conducted by Pricewaterhouse Coopers showed that the manner and frequency with which information is disseminated is a key factor in investor decision making. The CGC hence emphasised the need for companies to provide timely disclosure of information to all shareholders in a fair and equitable manner.

Future Work

25. While the government continually improves the regulatory environment, there is also a need for a strong civic effort to push for high standards of disclosure and accountability. In this regard, the media and education system has an important role to play. It will be an evolutionary process, but we have made good progress. Succeeding in this endeavour will require effort by all market participants - issuers, directors, regulators, policy-makers, exchanges, auditors, advisers, the media, educational institutions and investors. We have to work together to succeed.

26. As an example of the continuous effort required, a private-sector-led panel will be set up later this year to advise the Ministry of Finance and the Monetary Authority of Singapore on matters relating to corporate governance, disclosure requirements and accounting standards. The panel will comprise representatives from Singapore Exchange, professional bodies, market intermediaries, academics and businessmen. Future reviews and updates of the Code of Corporate Governance will be conducted by the panel.


27. Since the 1997/1998 crisis, many countries have strengthened their corporate governance regimes to improve transparency, disclosure and the Board's accountability to shareholders. However, following recovery from the depths of the crisis, there is risk that the pressures for change may recede. There is therefore need to maintain our commitment to fully implement structural reforms and programmes needed to improve corporate governance. Singapore is pleased to contribute to the process of strengthening corporate governance by adopting a Code of Corporate Governance.

28. Singapore lauds the efforts of the OECD, World Bank and ADB in raising corporate governance standards in the region. The close cooperation between the World Bank, ADB, OECD and the regional countries will give impetus to the formulation and implementation of corporate governance reforms. The regular dialogue sessions are a useful platform to exchange views and experiences, and for sustaining the efforts and momentum needed to improve corporate governance practices. This Roundtable is a very good example, and I wish you success in all your future efforts.

29. Thank you.