1. Mak Yuen Teen SIAS Corporate Governance Conference, 8 October 2008

2. Corporate governance refers to having the right people, structure and processes to direct and manage the company, in order to enhance its long-term value, through enhancing performance, accountability and risk management. It is about empowering management, while ensuring that there is adequate oversight and accountability.

3.  Having the right people is as (more?) important as structure and processes  Robust risk management is critical to good corporate governance (and may be undermined by design of “pay for performance” schemes)  The board should not micro-manage

4.  To improve substance, the board must: ◦ believe in accountability ◦ take responsibility for governance ◦ seek continuous improvements ◦ incorporate good governance principles into everything it does

5.  Hold directors and senior management to the highest ethical standards ◦ having a code of conduct or ethics for directors and senior management is a good start ◦ enforcing ethical standards on directors and senior management is critical

6.  Rigorous processes should be followed in: ◦ recruiting the right directors, which involves assessing current mix of skills and backgrounds of directors against the desired mix, and having a robust process for identifying and selecting candidates  diversity in competencies and backgrounds is valuable provided it’s not “tokenism” (e.g., specialists/generalists, CEOs/non-CEOs, local/foreign directors, gender, races, private/public/non-profit, etc.)

7.  Pros: ◦ knowledge of overseas market in which company has a listing or significant business ◦ not part of “old boys’ network” so better able to express dissenting views ◦ influence the board to adopt international good practices  Cons ◦ lack of knowledge of local laws and practices ◦ difficulty in actively contributing to board and committee work ◦ difficulty in paying them adequate fees or may lead to fee escalation for entire board if no policy on differential fees for foreign directors

8.  Rigorous processes should be followed in: ◦ inducting and developing directors ◦ assessing independence of independent directors to ensure that they are independent in substance, continue to be so, and likely to be perceived to be so ◦ assessing board and director performance to ensure that the board and individual directors are in fact adding value

9.  In the UK, the Institute of Chartered Secretaries and Administrators (ICSA) has published a guidance note on “Induction of Directors” (http://www.icsa.org.uk), divided into:http://www.icsa.org.uk ◦ essential information to be provided immediately (directors’ duties, company’s business, board issues); ◦ additional material to be provided within the first few months ◦ additional information which the company secretary might consider making the director aware of

10.  “Principles-based” approach to assessment of independence by the NC: ◦ determines whether the director is caught by one of the 4 relationships in guideline 2.1 ◦ considers whether there is any other relationship or factor which may influence the director’s ability to act independently (e.g., long tenure, interlocks) ◦ considers the director’s actual behaviour ◦ carefully explains why director is deemed independent where threats to independence exist

11.  A typical board assessment questionnaire may cover: ◦ board structure, roles and responsibilities ◦ board meeting processes ◦ board culture and relationships ◦ board’s access to information and management ◦ board’s involvement in strategy and planning ◦ board’s involvement in monitoring  Committee performance should also be assessed

12.  Some key issues: ◦ Feedback from management ◦ Feedback from key shareholders ◦ Use of external party ◦ Simple annual, plus more comprehensive less regular, evaluations ◦ Quantitative vs qualitative ◦ Benchmarking to other boards ◦ Using the results of assessment

13.  Board and management must have a good working relationship but without becoming too close  Board and management must have clear understanding of their respective roles and responsibilities  Board should delegate clearly, have clear reserved powers and supervise its delegation

14.  Supervising delegation requires the board to be pro-active in asking questions and seeking information  Certain reserved powers can be delegated to board committees but this should be explicit  Beware of board committees over-reaching into management

15.  Approval of vision, mission, values statement, code of ethics and strategic plan  Recommendation to appoint/change auditors  Recommendation on the remuneration of auditors  Approval of auditors’ engagement letter  Review of auditors’ recommendations and observations  Approval of all circulars and other documents, including those required by the stock exchange to be sent to shareholders  Approval of press releases on matters decided by the Board  Approval/review of interested party transactions

16.  Approval of interim and final accounts and reports  Approval of interim dividends and recommendation of a final dividend  Approval of all significant changes in accounting policies and practices  Approval of budget  Approval of all changes to the organisation of senior management  Approval of CEO remuneration and policy  Approval of individual items of expenditure in excess of a stated amount

17.  An internal control system should include at least the following: ◦ explicit assignment of responsibilities for internal control ◦ procedures for assessing the effectiveness of internal controls ◦ reporting of significant risk and internal control matters to the Board and CEO ◦ whistleblowing arrangements

18.  According to the ASX recommendations, a sound risk management system should include: ◦ policies on risk oversight and management, which clearly describe roles and accountabilities ◦ policies which cover oversight; risk profile; risk management; compliance and control; and assessment of effectiveness ◦ the board’s oversight of establishment and implementation of the risk management system, and review of its effectiveness at least annually

19. ◦ risk profile should cover material financial and non-financial risks, and should be regularly reviewed and updated ◦ management’s responsibility for establishing and implementing a system for identifying, assessing, monitoring and managing material risk throughout the organisation ◦ means of analysing the effectiveness of its risk management system and effectiveness of implementation

20. There is often an over-reliance on cash bonuses based on annual profits and stock options to “pay for performance” Such “pay for performance” schemes encourage senior executives to take on more risk without bearing the full consequences (they have asymmetric payoffs) Relative TSR also does not properly account for risk

21. Yr 1 profit Yr 1 bonus (5%) Yr 2 profit Yr 2 bonus (5%) Yr 3 profit Yr 3 bonus (5%) Total profit Total bonus $1m$50k$1.5m$75k$2m$100k$4.5m$225k $2.5m$125k-$1.5m$0$2.5m$125k$3.5m$250k

22. Is it time for risk-adjusted measures to be used for rewarding CEOs? (but CEOs have considerable power in influencing pay level and policy) Different pay for performance schemes may be appropriate for different types of companies and for different senior executives within the company Stock options are generally inappropriate for NEDs

23. May need to consider raising premiums for chairmen relative to NEDs in Singapore NED fees are too low for some companies but may be reaching competitive levels for larger companies Attendance fees may be starting to create dysfunctional incentives in some companies

24. Questions? Slides can be downloaded from www.cgfrc.nus.edu.sg www.cgfrc.nus.edu.sg email: yuenteen.mak@watsonwyatt.com; bizmakyt@nus.edu.sg yuenteen.mak@watsonwyatt.com bizmakyt@nus.edu.sg