Published on 07 Nov 2022

Investors must make their voices heard in current consultation on listing rule changes

Nine-year limit to independent director tenure and mandatory disclosure of board and CEO pay likely to meet resistance from corporate sector

THE Singapore Exchange (SGX) has launched a public consultation on proposed changes to its listing rules that will limit the tenure of independent directors (IDs) to nine years and make the full disclosure of remuneration for directors and chief executives mandatory.

As this column noted last month, these changes are unlikely to be popular with corporate boards. Indeed, this public consultation could draw strong responses from parties with vested interests in the status quo. It is therefore crucial that investors ensure their voices are heard loud and clear.

The public consultation began on Oct 27, and is scheduled to end on Nov 17. The consultation paper and a template for responses can be found on SGX's website.

The way I see it, investors have good reason to support the proposal that listed companies disclose in their annual reports exactly what they pay their CEOs and each of their directors. This is required under the Code of Corporate Governance (CG Code), and in a number of key foreign jurisdictions.

SGX pointed out in its consultation paper that United States-listed companies are required to disclose not only the remuneration of their CEOs and directors, but also that of their chief financial officers and three most highly compensated executive officers.

Hong Kong-listed companies are required to disclose the remuneration of each director on a named basis, as well as that of the five highest paid individuals on an unnamed basis.

"Our proposal will therefore bring Singapore's disclosure requirements on director and CEO remuneration in line with global standards," SGX said in its consultation paper.

This full remuneration disclosure is also vital in order for investors to assess whether directors and CEOs are being appropriately incentivised.

A study by KPMG Singapore found that most Singapore-listed companies currently report their CEO and director remuneration in bands. Only 18 per cent disclose what they pay their CEOs, and only 35 per cent disclose what they pay each of their directors.

Given this failure by a broad swathe of Singapore-listed companies to comply with the CG Code on remuneration disclosure, SGX is right to make compliance mandatory under its listing rules. Investors should participate in the public consultation and express their strong support for this proposed requirement.Push for board renewal

The proposal to hardcode the nine-year term limit for IDs under the listing rules is a somewhat more complicated matter.

As with the issue of remuneration disclosure, SGX is taking action because the boards of Singapore-listed companies have failed to do what is expected of them.

SGX noted in its consultation paper that a hard term limit for IDs was considered in the past, but there were concerns it would be "overly mechanistic". The current requirement of subjecting IDs who serve beyond nine years to a two-tier vote was deemed to offer shareholders more agency in retaining high-quality and independent-minded IDs.

It wasn't long before the authorities realised they had made a mistake, and that many Singapore-listed companies were not going to renew their boards without being pushed.

In its consultation paper, SGX cited a study by Nanyang Business School that found nearly 70 per cent of 391 long-serving IDs up for re-election in 2021 had retained their board positions through the two-tier voting process.

Since the nine-year rule came into effect at the beginning of this year, many companies have also chosen to hold on to their long-tenured IDs by simply re-designating them as non-independent non-executive directors.

In order to accelerate board renewal and promote board independence, SGX has proposed to limit the tenure for IDs to nine years, with a transition period of one year.

As an investor, I support this proposal. While some foreign jurisdictions are moving towards a 12-year tenure limit for IDs, a nine-year cap seems appropriate for Singapore. The Monetary Authority of Singapore has imposed nine-year tenure limits for IDs of Singapore-incorporated banks and insurers, as well as for managers of real estate investment trusts.

A one-year transition period also seems ample. After all, companies have had plenty of time to adjust to the idea that IDs should not serve for more than nine years without very good reasons.

Even if an ID who has served for more than nine years has just been re-elected for another three years, companies should be made to replace them or redesignate them as non-independent non-executive directors at the end of the one-year transition period.Promote an independent-minded approach

While hardcoding the nine-year term limit for IDs makes sense given the slow pace of board renewal in Singapore, it reinforces the current practice of treating independence as largely a matter of whether one has links to the company's management or controlling shareholder, rather than whether one is genuinely independent-minded.

The reality is that IDs are appointed with the backing of the company's management and controlling shareholder. They have no personal incentive to rock the boat. Indeed, an ID who does not share the views of the company's management and controlling shareholder on key issues would probably not last long.

On the other hand, minority investors usually do not question the supposed independence of a company's IDs until something goes wrong. For minority investors, an ID's lack of independent-mindedness is something that only becomes apparent after the fact.

SGX should look into ways to ensure that ID appointments do not become cushy sinecures for senior corporate figures and retired government officials, and that IDs face some degree of minority investor retribution when they fail to act independently.

One idea is to subject IDs to a modified two-tier vote at every annual general meeting: with one resolution voted on by all shareholders, and a separate resolution voted on by all shareholders excluding the company's directors, CEO and their associates, as well as the company's controlling shareholder.

This would give minority investors a timely and potent means of expressing their satisfaction or otherwise regarding the performance of their IDs, and incentivise IDs to be more proactive in addressing issues of concern to minority shareholders.

It is my hope that readers of The Business Times respond to the public consultation now underway, and offer SGX their own views on what can be done to ensure that the boards and management of Singapore-listed companies better serve the interests of all shareholders.

Source: The Business Times