Corporate Governance: Recent Developments and Regional Practices A/P Mak Yuen Teen Co-Director, CGFRC, NUS Business School Deputy Chairman, Corporate Governance Committee, ICPAS

OUTLINE Singapore Code versus international benchmarks Recent international CG codes and rules Singapore Code versus international benchmarks CGFRC-S&P studies of regional CG practices and disclosures (large companies) CGFRC-JLT survey of corporate governance and directors’ and officers’ liability issues

Recent International Developments U.K. –New Combined Code (2003), Directors’ Remuneration Report Regulations (2002) U.S. - Sarbanes-Oxley Act (2002), SEC and NYSE Rules (2002-2003) Australia - ASX Principles of Good Corporate Governance and Best Practice Recommendations (2003); CLERP 9 Reforms (2002/3) H.K. – HKEx Listing Rule Amendments; Draft Code on Corporate Governance Practices and Corporate Governance Report (2004)

Major International Developments Non-prescriptive Balanced Prescriptive U.S. U.K. Australia Singapore Hong Kong

Board Matters Board composition Singapore: at least one-third independent directors U.S., U.K. and Australia: At least half/majority of independent directors H.K.: At least 3 independent directors; recommended best practice, one-third

Board Matters Definition of independence Singapore: independence from management U.S.: independence from management U.K., Australia and H.K.: independence from management and significant shareholders

Board Matters Board leadership Singapore: CEO and Chairman should be separate (and, if related, should be disclosed) U.K., Australia and H.K.: CEO and Chairman should be separate U.K.: Chairman should be independent at the time of appointment U.K. (Australia): Appointment of a senior or lead independent director (if Chairman is not independent) U.K. and Australia: The CEO should not go on to become Chairman of the same company

Board Matters Nomination committee (NC) composition Singapore, U.K., Australia and H.K.: majority and NC Chair independent U.S.: All NC members independent U.K.: The Chairman of the board should not chair the NC “when it is dealing with the appointment of a successor to the chairmanship.”

Board Matters Nomination process Singapore: No specific requirement to disclose nomination process U.S., U.K. and Australia: process for selection of directors should be disclosed U.K.: explanation if neither external search consultancy nor open advertising is used

Board Matters Tenure of directors Singapore: re-nomination and re-election at regular intervals but no limit on tenure U.K., Australia and H.K.: long tenure can affect independence U.K.: non-executive directors who serve more than nine years should be subject to annual re-election by shareholders and requires explanation from the board for such directors to be deemed to be independent

Board Matters Appointment of directors Singapore: no provision on formal appointment letter U.K. and Australia: formal appointment letter setting out terms and conditions

Board Matters Director orientation and on-going training Singapore: appropriate training and orientation on first appointment, and ongoing training also emphasised in U.S., U.K., Australia and H.K. U.K.: Chairman of the board responsible; Australia: NC responsible U.K. and Australia codes include guidance on topics to be addressed in induction programmes for new directors

Board Matters Limits on directorships All countries require disclosure of current and past directorships U.K.: “No individual should be appointed to a second chairmanship of a FTSE 100 company” U.K.: A full time executive director should not take on more than one non-executive directorship or chairmanship in a FTSE 100 company.

Board Matters Performance evaluation Singapore: board and individual director evaluation UK: evaluation of board, board committees, individual directors, Chairman Australia: evaluation of board, board committees, individual directors and key executives U.S.: evaluation of board and board committees H.K.: to be considered

Remuneration Remuneration committee (RC) Singapore and Australia: majority of independent directors with independent Chair H.K: majority independent U.K. and U.S.: RC should include only independent non-executive directors RC should be responsible for appointing remuneration consultants

Remuneration Use of share options for NEDs Singapore: endorsement of use of share options for directors U.K. and Australia: NEDs should generally not be awarded share options. U.K.: in exceptional cases where share options are to be given, shareholder approval is required, any shares acquired should be held until at least one year after the NED leaves the board, and holding of share options could be relevant in determining whether a director is independent.

Remuneration Disclosure of remuneration - Singapore: Remuneration of directors and at least top 5 key executives (who are not directors), including names, within bands of $250,000 Breakdown in percentage terms of each director’s remuneration into components Disclosure of remuneration details of related employees earning more than $150,000 on no-name basis

Remuneration Disclosure of remuneration - U.K.: Directors remuneration report must include: A forward looking remuneration statement A performance graph of the company’s shareholder return for the past 5 years against a market index Details of RC members and external remuneration consultants Details of directors’ service contracts Detailed disclosure of individual remuneration (audited) for each director Remuneration report to be approved by the board and subject to non-binding resolution by shareholders

Disclosure of remuneration - U.S.: Detailed disclosure of compensation of directors and top 5 highest-paid executives in the company in exact amount. Disclosure of remuneration – Australia: annual disclosure of details of nature and amount of each element of the fee and salary of each individual director and each of the five highest-paid officers of the company

Disclosure of remuneration – H.K.: Under Listing Rules, directors’ fees and any other reimbursement or emolument payable to a director must be disclosed on an individual and named basis

Audit and Accountability Audit committee (AC) Singapore: All non-executive, majority independent; independent Chair; at least two members should have accounting or related financial management expertise or experience U.K. and U.S.: AC members should all be independent U.K.: at least one member have recent and relevant financial experience U.S.: all should be financially literate, with at least one “audit committee financial expert” as defined by SEC rules, with disclosure if there is no such expert

Audit and Accountability Audit committee (AC) Australia: all non-executive, majority independent; independent Chair other than board Chairman; all financially literate with one with financial expertise H.K.: all non-executive, majority independent; independent Chair; one independent director with appropriate professional qualifications or accounting or related financial management expertise (Listing Rule)

Audit and Accountability Internal audit Singapore: internal audit function should be established U.S.: mandatory under new NYSE rules, but not under NASDAQ rules H.K. (U.K.): companies without internal audit should annually consider whether there is need for an internal audit function (and explain the absence of such a function). Australia: “a company, especially a substantial company, is encouraged to have an internal audit function”

Audit and Accountability Certification of financial reports U.S.: the Sarbanes-Oxley Act requires both the CEO and CFO to certify the companies’ quarterly and annual financial reports. Australia: the CEO and CFO should be required “to state in writing to the board that the company’s financial reports present a true and fair view” of the company’s financial conditions. There is a proposal to amend Corporations Act to require the CEO and CFO to sign off the accounts to the Board

Communication with Shareholders U.K. Code encourages contact between major shareholders and Chairman/NEDs Singapore, U.K. and H.K.: chairmen of AC, NC and RC should attend AGM Singapore and Australia: external auditor should attend AGM (proposal in Australia to make this a legal requirement)

Role of Institutional Shareholders Singapore: no provisions relating to role of institutional shareholders U.K.: institutional shareholders should enter into dialogue with companies, carefully evaluate explanations for departures from Code, and make considered use of their votes

Other Issues Singapore: no provisions in the Code Code of conduct and ethics/Whistleblowing Singapore: no provisions in the Code Australia: code of conduct, which enables employees to whistleblow U.K.: AC should review arrangements by which staff may confidentially raise concerns about possible improprieties in financial reporting and other matters U.S.: code of business conduct and ethics with disclosure of waivers; whistleblowing provisions in Sarbanes-Oxley

Regional CG Practices: CGFRC-S&P Studies Countries covered: Singapore, Malaysia, Thailand and Indonesia Top 50 companies by market capitalisation or all companies included in country’s major stock market index. The latest annual reports published by 2004 used. Corporate governance disclosure scorecard developed by Standard & Poor’s The scorecard items reflect best practices embodied in international corporate governance codes

Regional CG Practices: CGFRC-S&P Studies Item Singapore Malaysia Thailand Indonesia* Sample size 45 50 42 Maximum score 119/140 94/140 75/140 54/160 Minimum score 16/140 44/140 4/140 3/160 Mean 80.58 64.92 37.56 23.05 Standard deviation 28.57 11.85 16.60 11.83 Median 92.00 64.00 35.00 21.50

Regional CG Practices: CGFRC-S&P Studies

Regional CG Practices: CGFRC-S&P Studies Note that definition of independent directors differs across countries

Regional CG Practices: CGFRC-S&P Studies * May or may not be related

Regional CG Practices: CGFRC-S&P Studies

Regional CG Practices: CGFRC-S&P Studies

Regional CG Practices: CGFRC-S&P Studies

Regional CG Practices: CGFRC-S&P Studies

Regional CG Practices: CGFRC-S&P Studies

Regional CG Practices: CGFRC-S&P Studies

Regional CG Practices: CGFRC-S&P Studies

Regional CG Practices: CGFRC-S&P Studies

Regional CG Practices: CGFRC-S&P Studies Disclosure of Director Remuneration Country   Singapore Malaysia Thailand Indonesia Executive Directors Exact Amount 20% 14% 18% 0% Bands 67% 80% Non-executive Directors 27% 16% 58% 78% Top Company Executives

Regional CG Practices: CGFRC-S&P Studies

Regional CG Practices: CGFRC-S&P Studies

CGFRC-JLT Corporate Governance and D&O Liability Survey (Singapore) A survey: to assess the awareness of corporate governance and D&O liability issues in Singapore Questionnaire sent to 472 companies listed on SGX Response rate of 22% (105 companies) 14 respondents did not disclose their identity

Perceptions of Corporate Governance Some key findings: 56% agreed that the standard of corporate governance in Singapore is comparable to those of the USA and UK while only 10% disagreed 92% agreed that the standard of corporate governance in Singapore is high among Asian countries However, 66% agreed that there is substantial diversity in the standards of corporate governance amongst companies in Singapore and only 9% disagreed

Perceptions of Corporate Governance 84% agreed that the companies could be doing more to improve corporate governance and only 2% disagreed About equal percentage of respondents agreed and disagreed with the view that minority shareholders in family-controlled companies are equitably treated by controlling shareholders 60% agreed that minority shareholders’ interests are adequately protected and only 16% disagreed 63% agreed that market manipulation/malpractices is not a significant problem and only 11% disagreed

Perceptions of Corporate Governance 48% agreed that good corporate governance has a beneficial effect on a company’s financial performance (e.g., higher share price or lower cost of capital) and 9% disagreed over half the companies agreed that majority of directors on the board should be independent though nearly 30% disagreed almost all respondents agreed that independent directors should be independent of management as well as controlling shareholders

Perceptions of Corporate Governance nearly three-quarters of the respondents agreed that the audit committee should comprise entirely of independent directors whereas only half the respondents held the same views for remuneration committee and the nominating committee nearly 20% of the respondents disagreed that the CEO and Chairman positions should be held by different persons while over a half agreed with the view that separate individuals should hold these positions

Perceptions of Corporate Governance only a third of the companies agreed that the Chairman’s position should be held by an independent director and another third disagreed about three-quarters of the respondents also felt that the Code of Corporate Governance should have different guidelines for companies of different sizes and only 12% disagreed with this view more than 80% agreed that there should be a limit on number of directorships

Measures to Improve Corporate Governance All companies, except one, reported taking some measures to increase their standard of corporate governance. Data for Hong Kong (used in this entire presentation) is obtained from the “Corporate Governance and Directors’ & Officers’ Liability Survey of Listed Companies in Hong Kong”, 2003 commissioned by Jardine Lloyd Thompson Limited and conducted by Policy 21 Ltd., The University of Hong Kong

Reasons for D&O liability claims Inadequate or inaccurate disclosure of information and accounting and other fraud were the top two reasons for D&O liability claims. Reasons for D&O liability claims Inadequate/inaccurate disclosure 73% Accounting & other fraud 69% Conflict of interest 67% Mismanagement leading to poor financial performance 60% Interested party transactions 57% Personal trading in shares of company 54%

D & O Liability Many see an increasing threat of claims against directors and officers

D & O Liability Over three-quarters of the respondents provide insurance cover against D&O liability claims, however, high coverage amounts are very rare. In the Hong Kong survey, 41.5% of the companies did not have D&O liability insurance while in Singapore, the figure is 21%.

Thank You… Email: bizmakyt@nus.edu.sg; website: www.cgfrc.nus.edu.sg