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The worry now is that they may be asked to do too much
By JAMIE LEE
13 January 2012
Fresh revisions to regulations and corporate governance guidelines for the new year have won the approval of market watchers, who see these improvements aligning Singapore’s rules and best practices with those of other jurisdictions.
The focus has now swung sharply to directors, say observers. They are concerned that directors are now being asked to bear too heavy a load, and note that there is still some way to go before the ideal balance is struck between regulation and self-governance by the boards.
‘I don’t think we have reached a level of equilibrium,’ said Lawrence Loh, associate professor at NUS Business School.
‘We’re still experimenting with this delicate division of labour,’ added Prof Loh, who is also a researcher at the school’s Centre of Governance, Institutions and Organisation.
Developments in listing rules and the Code of Corporate Governance mean that directors will be obliged to work harder to provide a check on management and the risks companies assume, which has prompted calls for directors to insure themselves against their liabilities.
For one thing, the Singapore Exchange revised the listing rules last September such that the board’s audit committee will now hold a certain responsibility over the behaviour of the chief financial officer.
The committee must confirm that it has no information that would deem the CFO as not having the necessary ‘competence, integrity and character’. The board must also ensure a strong system of internal controls, and call for an independent audit to assess this if necessary, SGX said.
Meanwhile, the proposed new Code of Corporate Governance - a list of guidelines that companies are expected but not forced to follow - requires the board to ensure that the CEO and CFO provide assurance that financial records are sound.
The Corporate Governance Council, which reviewed the code, also called for the definition of independence in the boardroom to be tightened - a move deemed overdue by the market. A director should now be deemed non- independent if he has a direct association with a substantial shareholder of the company in the current or in any of the past three financial years.
Under certain circumstances, such as if the chairman and the chief executive are one and the same, half of the company’s board must be made up of independent directors, up from one-third previously.
This should increase scrutiny over those invited to the board, amid prevalent criticism that firms still rely on the old boys’ club to recruit directors.
‘Companies will need to work towards having more effective directors on the board, as non-effective directors may expose boards and companies to potential liability,’ said Sovann Giang, executive director at the Singapore Institute of Directors.
The worry now is that directors may be asked to do too much.
Said Prof Loh: ‘Directors will have more individual accountability, and they probably need to move beyond basic expectations. The problem is, are we expecting too much from directors? What is the fundamental role of the board?’
Jeanette Wong, group executive of DBS institutional banking group, earlier alluded to this. At a panel discussion last November, she said that directors should not just look at good governance, but also at making sure the company survives in the long term.
Andrew Martin, principal, and Richard Lam, senior associate, of law firm Baker & McKenzie Wong & Leow, pointed out that Singapore’s principle-based approach is consistent with that of the United Kingdom, and works partly because Singapore does not have an ‘entrenched institutional investor base’ that can deal with heavy regulation that is seen in the United States.
Still, the recent changes to rules and guidelines have helped to spell out the duties of directors.
‘A director’s role has not necessarily become that much more onerous, but these responsibilities and duties have, perhaps, become more apparent,’ said Jacqueline Loke, partner in Rodyk & Davidson’s corporate practice group, adding that the duty remains that of disclosure.
‘Potential directors will perhaps now take a little more time, and rightfully so, to consider whether they have the ability, time and passion to take on a new directorship role and to discharge the responsibilities that go with it. That can only be a good thing.’
On top of the changes was a landmark decision by the courts to sentence a former independent director of Airocean, Peter Madhavan, to four months’ jail for his role in issuing a misleading stockmarket statement. Although the case is under appeal, it may discourage people from becoming directors.
‘It may be inevitable that the recent prosecutions of directors may deter prospective directors from joining the pool,’ said Mr Martin and Mr Lam.
‘However, the fear of prosecution may not necessarily be a bad thing if it is a wake-up call to existing directors who have grown complacent in their offices,’ they added.
Even with the greater emphasis on directors and boards, the cold reality is that fraud and market misdeeds may still happen even with tightened rules and higher standards of corporate governance.
‘No amount of laws or regulation can guarantee no further mishap as determined individuals will always find ways to perpetrate corruption, fraud or dishonesty,’ said Mr Martin and Mr Lam.