Opening Address By Mrs Lim Hwee Hua, Minister Of State For Finance And Transport, At The 2006 NUS - SID Conference Grand Ballroom, Ritz Carlton Millenia Thursday 20 July 200620 Jul 2006
Mr Chew Heng Ching, Chairman SID,
Distinguished Guests, Ladies and Gentlemen,
We are living in interesting times. The organising committee has selected a most thought-provoking theme, that of 'Transforming the Board'. Serious-minded and responsible directors may think I am being polite by using the term 'interesting times'.
2. To many directors, it is fast becoming 'challenging times' or perhaps even 'more onerous times'. To shareholders, especially the smaller retail investors who are frustrated by corporate misdeeds of executives or a negligent board, it's more like 'accountability times'. And to regulators who face multiple episodes of corporate failure, it's more like `delicate times' as they strive to balance the imposition of stricter measures or standards with an increase in compliance burden.
3. So what is meant by 'Transforming the Board' - Judging by the numerous new measures and rules put in place across the different jurisdictions, in response to rising corporate failure, it would seem that visible changes to board composition, practices and behaviour are the order of the day.
4. Nothing could be further from the truth; without substance and the true expression of the spirit of what's really required, all new forms of board appearances, relationships, practices and conduct, would amount to nought. Simply put, there are always creative ways of bypassing rules or complying with specific and ostensibly tougher standards. Hence the solution must not lie in rules, and yet more rules, alone. We must recognise that rules can only be the means to an end, which is good corporate governance.
Importance of Good Governance
5. The Singapore Institute of Directors' mission is "to promote high standards of corporate governance through education and training, and upholding the highest standard of professional and ethical conduct of directors". This is an important mission. You play a key role in not only raising the governance standards in Singapore, but in strengthening the credibility and integrity of Singapore as a financial and business centre.
6. Investors are more focused on corporate governance than ever before. In a global economy, the effects of a company's behaviour resonate internationally, not just locally. In aggregate terms, if a country does not have good governance, it runs the risk of capital flight.
7. Institutional investors will continue to exert more pressure on companies to improve their governance standards. Pension funds, mutual funds and hedge funds, now own significantly more publicly traded equity than they did a few decades ago. The pressure manifests itself in various forms - from demanding more disclosure and transparency to specifying preferred board composition to stipulation of good internal systems and practices.
8. To demonstrate effective governance, companies need to focus on two key areas. The first is to create a strong ethical compass that will guide the organisation. The second is to establish a comprehensive framework of internal controls that will foster a culture of accountability in the firm. Allow me to elaborate.
Strong Ethical Compass
9. At its core, good governance is about good ethics. However, according to a global survey by PriceWaterhouseCoopers, most companies equate effective governance with merely meeting the demands of regulators and legislators. They tend to look at this as another compliance exercise, merely checking off a list of requirements. Such companies are completely missing the mark.
10. Mere compliance with formal rules does not assure us of superior business performance. A Board that merely checks off a list of perfunctory responsibilities is not doing its job. The directors and senior management must be guided by a steadfast sense of purpose and an uncompromising commitment to integrity. It is the message they send to all levels in the company about fairness in dealing with shareholders and honesty in dealing with customers and clients that sets the ethical tone of the company.
Sound Internal Control Framework
11. While good ethics sets the tone and basis for effective corporate governance, it is systems and frameworks that ensure that there is a spirit of accountability within the company. Through such a system of checks and balances, there is better decision-making and shareholders' investments are better protected. To achieve this, the Board should ensure that the firm's internal controls are adequate for the nature and the scope of their businesses.
12. When the Code of Corporate Governance was revised last year, the responsibilities of the Audit Committee were expanded to reflect the growing emphasis on internal controls. The added responsibilities include reviewing and ensuring the integrity of financial statements, reviewing the effectiveness of the company's internal audit function, and making recommendations to the Board on engaging an external auditor. In a disclosure-based regime such as ours, the quality of financial information is critical. Competent, independent and tough-minded Audit Committees are therefore key in protecting the integrity of our financial reporting process.
13. I would now like to touch on two areas of board effectiveness that have not quite attracted the attention and focus they deserve. The first is diversity; the second, competence.
Diversity in Board Composition
14. It is apparent that directors have a very full plate today. Their work is becoming increasingly complex, and they need to commit more time to the Boards they serve on in order to contribute effectively. Owing to these time constraints, companies can no longer afford to rely on the small pool of tried and tested directors when choosing potential candidates for their boards.
15. Choosing from a broader pool of candidates will also create diversity in the Board room. Diversity provides companies with a varied mix of skill sets to deal with increasingly complex business situations. Fresh minds offer new perspectives to the board just as new and different functional skills contribute to the growth and development of the business.
16. In a nutshell, companies must constantly strive towards a board mix that offers a variety of functional skills such as legal and financial expertise, and of business experiences, say across different sectors or markets, that are relevant to their specific needs.
Directors' Training and Evaluation
17. Finally, to broaden knowledge and improve performance of directors, companies should avail directors of appropriate training programmes to enhance their competencies. I am heartened to know that SID's ongoing Company Directors' Course has been helping directors cope by familiarising them with their increasingly complex roles and responsibilities. The course also covers critical areas such as accounting and finance to equip directors with the right tools to discharge their fiduciary duties. I encourage all companies ensure that their directors, especially the new appointments, are suitably equipped.
18. Companies should also have a proper evaluation process in place to provide feedback to directors on their performance. Understandably, there has been some sensitivity regarding director evaluation, especially when peer appraisal is involved. Some attribute it to a cultural divide. Notwithstanding the apparent discomfort, it is critical that every company has in place a means of evaluating the effectiveness of the Board, both collectively and individually. It is only with proper feedback that a board can perform to the best of its capabilities.
19. In conclusion, allow me to reiterate that a board m ust consciously and conscientiously pursue substance over form, so that adopting good governance principles and best practices will become an integral part of the corporate culture. I would like to commend NUS and SID for jointly organising this conference. It offers a valuable platform for discussions on how corporate leaders and directors can work together to improve governance standards and meet the challenges in a global economy. I wish you a fruitful discussion ahead.
20. Thank you.