Relevant to Paper F4 (SGP)
Corporate governance can be defined as the system by which companies are directed and controlled. Its objective is often stated as being the enhancement of corporate profit and shareholder gain while having regard to the impact that this may have on other stakeholders of the company.
Sir Adrian Cadbury once described corporate governance as follows: ‘Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations, and society.’
Global Corporate Governance Forum, World Bank, 2000.
In line with the description above, corporate governance frameworks and mechanisms are generally targeted at improving a company’s efficiency (or performance) and/or providing greater transparency and accountability to shareholders and other stakeholders.
One way of looking at the regulatory framework for corporate governance in Singapore is to divide the framework into two broad categories:
It is not possible, in an article of this length, to discuss all the relevant rules that relate to these aspects of the regulatory framework. Instead, this article highlights the key rules that operate in the respective categories, and their function.
The regulatory framework for corporate governance in Singapore is underpinned by corporate law and securities regulations. These are reflected in common law rules as well as in statutory enactments such as the Companies Act (cap 50, ‘the Act’) and the Securities and Futures Act (cap 289). This is supplemented by quasi-legislative enactments such as the SGX-ST Listing Manual (‘SGX Listing Rules’), which applies only to companies listed on the bourse of the Singapore Exchange Securities Trading Ltd (‘SGX-ST’), and the Singapore Code on Takeovers and Mergers. The key aspects of corporate governance governed by law are discussed below. Compliance with legal rules is mandatory in that a breach of these rules may result in civil or criminal sanctions or, in the case of a breach of SGX Listing Rules, administrative sanctions such as censure, share trading suspension, or delisting.
Structure and control
There are three aspects to the regulatory mechanisms relating to the structure and control of companies. First, it is important to understand and provide access to information on the shareholding and organisational structure of a company because this has an impact on who has control over the company which, in turn, has an impact on how the company is governed. The law therefore requires that companies keep registers of members, and these registers may be inspected (sections 190–192). (Note: All section numbers will refer to the Companies Act (cap 50) unless otherwise stated.)
In addition, listed companies have to maintain a register of substantial shareholders who have to report changes in their shareholdings (division 4 of Part IV of the Companies Act and section 137 of the Securities and Futures Act). ‘Substantial shareholders’ are defined as being those who have an interest in shares which carry not less than 5% of the total votes attached to all the voting shares in the company. Similar reporting and disclosure requirements are imposed in relation to directors as they too are in a position to control the company. Parties who control voting rights through other persons or companies, or through a chain of companies (a practice sometimes referred to as ‘pyramiding’), must also disclose these interests because of provisions that deem such interests as belonging to the controlling parties (see section 7).
Second, for companies to operate effectively and efficiently, it is necessary to demarcate clearly the respective roles that management and owners undertake in the venture. Essentially, management must be able to perform their function without unnecessary intervention by the owners. Conversely, owners may wish to have in place control mechanisms that enable them to rein management in, should the need arise. Section 157A of the Act provides that the business of the company is to be managed under the direction of the directors, and gives to the directors the right to exercise all the powers of the company except those reserved by the Companies Act or the company’s constitutional documents.
The owners generally cannot override the decision of the board if they are unhappy with any management decision. Their main recourse is to replace the board through the process provided for by the company’s articles and the Act. The owners, however, retain some powers (generally exercisable by the members at a properly convened general meeting). These relate to matters that pertain to the constitutional structure of the company, or which affect the shareholders’ rights, or which require their intervention because of potential conflicts of interest that the directors may otherwise face. For example, directors cannot issue shares or dispose of the whole (or substantially the whole) of the company’s undertaking without prior approval of the company given at a general meeting (sections 161 and 160). The owners may also amend the memorandum or articles of association of the company and restrain the directors from acting outside any stated objects of the company (section 25). Directors are also not permitted to be paid any emoluments without the prior consent of a general meeting (section 169). In addition, shareholders of unlisted companies have the right to commence a derivative action on behalf of the company if the directors refuse to take action in relation to wrongs committed against the company (section 216A). This is particularly useful where the company’s controllers themselves or their associates are the wrongdoers.
Finally, the law also provides direct protection against the abuse of a controlling power, whether it be by the board or the controlling shareholders. The key mechanism for this is to allow aggrieved shareholders (who are more often than not minority shareholders) to seek redress through the courts where they can show that the actions of the directors or majority shareholders are discriminatory or unfairly prejudicial, or if the company has been run in an oppressive manner or with disregard to their interests (section 216).
Directors’ appointments and duties
As mentioned earlier, the general power to manage the company is vested in the directors. It is therefore important to have able directors to lead the company. While the law does not ask for any substantial qualifications for a person to be a director, other than the requirement for such a person to be of legal age and capacity, there are provisions that disqualify specified persons from being directors and from directly or indirectly managing companies. The circumstances whereby persons are disqualified relate mainly to situations where it is shown that the person is untrustworthy or unable to manage the company or their own finances properly (see sections 148 to 149A and 154 to 155A). Members also generally have a say in who they wish to have as a director, in accordance with the provisions of the company’s articles of association. In addition, members of public companies have a right to remove the company’s directors, regardless of the provisions in the company’s constitutional documents (section 152).
The law also specifies strict duties for company directors; these duties make them accountable to the company and protect the company against an abuse of directorial power. Under the common law these include:
If a director breaches any of these duties they may be liable either for damages, should the company suffer loss as a result of the director’s actions, or for an account of any gain or profit that they may have obtained consequent to the breach.
The Companies Act also has provisions governing directors’ duties which more or less correspond to their duties under the common law. Thus, under section 157 of the Act, directors have to act honestly and exercise reasonable skill and diligence in the discharge of their duties. They are also prohibited, under section 157(2) of the Act, from making improper use of information, obtained in the course of their appointment, to gain for themselves or others, or to cause loss to the company.
The Act also has rules governing specific corporate transactions to reduce the scope for abuse of directorial power. These include provisions prohibiting loans and other forms of financial assistance to directors, their family members, and director-related companies except in specified circumstances (sections 162 and 163). There are also provisions which require directors to disclose conflicts of interest (existing or potential), and provisions which require shareholders to approve matters where such situations may arise. For example, section 156 of the Act requires directors to disclose any transact ions and appointments to other offices which may give rise to potential conflicts of interest. Criminal sanctions may be imposed where any of the legislative provisions are breached.
Corporate disclosure and reporting and audit
The final aspect of legal regulation to be discussed here relates to the numerous corporate disclosure and reporting requirements that the law places on companies. The reason for these requirements is to enable shareholders and other stakeholders to access accurate and relevant information in a timely manner for informed decision making. The Companies Act has provisions governing proper maintenance and audit of accounting information (see Part VI of the Act), and it is compulsory for listed companies to have properly constituted audit committees (section 201B) to oversee these processes.
Companies are also required to maintain various registers that are open to shareholders and members of the public, as well as to file specified returns with the Accounting and Corporate Regulatory Authority. They must also prepare an annual report and present the report and their accounts for scrutiny by the shareholders. This provides shareholders with the opportunity to assess and query the company’s (and management’s) performance. In addition, there are other periodic and continuous corporate disclosure requirements imposed on publicly traded companies by corporate legislation and the SGX (see, for example, Chapters 7 to 10 of the SGX Listing Rules). These not only preserve the integrity of the securities market, but also keep members and investors informed of major developments. Of particular note is section 203 of the Securities and Futures Act, read together with the disclosure requirements under the SGX Listing Rules, which makes it an offence to intentionally or recklessly fail to notify the exchange of matters that are required to be disclosed, whether.
In addition to legislative and quasi-legislative regulation, codes and best practice also play an important role in regulating corporate governance. Unlike the former, regulation under the latter generally does not take the form of mandatory rules. Instead these serve as a guide, designed to encourage voluntary practices that are aimed at giving stakeholders greater confidence in the governance standards of the company.
The main source of best practice in Singapore is the Singapore Code of Corporate Governance 2005 (‘the Code’). While compliance with the Code is not mandatory, the SGX Listing Manual requires listed companies to describe their corporate governance practices with specific reference to the Code in their annual report. They must also disclose any deviation from any guideline of the Code and provide an appropriate explanation for the deviation in their annual report (SGX Listing Manual rule 710).
The Code contains 15 principles, supplemented by Guidelines and Commentaries, which relate to Board Matters (Principles 1 to 6), Remuneration Matters (Principles 7 to 9), Accountability and Audit (Principles 10 to 13), and Communication with Shareholders (Principles 14 to 15). The objective is not to prescribe corporate behaviour in detail but to encourage companies (in particular, listed companies) to adopt practices which aim to provide accountability while creating long-term shareholder value, and to secure sufficient disclosure so that stakeholders can assess the company’s governance practices and therefore respond in an informed manner. The key practices encouraged include:
As mentioned at the outset, it is not possible in an article of this length to give a detailed account of the various regulatory mechanisms in Singapore relating to all aspects of corporate governance. It is hoped, however, that the snapshot presented here provides a starting point for greater in-depth study of this topic.
Victor Yeo is associate professor at Nanyang Technological University, Singapore