eGuide to CG Code

An "independent" director is one who has no relationship with the company, its related corporations4, its 10% shareholders or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director's independent business judgement with a view to the best interests of the company. The Board should identify in the company's Annual Report each director it considers to be independent. The Board should determine, taking into account the views of the Nominating Committee ("NC"), whether the director is independent in character and judgement and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director's judgement. Directors should disclose to the Board any such relationship as and when it arises. The Board should state its reasons if it determines that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, including the following:

  1. A director being employed by the company or any of its related corporations for the current or any of the past three financial years;
  2. A director who has an immediate family member who is, or has been in any of the past three financial years, employed by the company or any of its related corporations and whose remuneration is determined by the remuneration committee;
  3. A director, or an immediate family member, accepting any significant compensation from the company or any of its related corporations for the provision of services, for the current or immediate past financial year, other than compensation for board service;
  4. A director:
    i.    Who, in the current or immediate past financial year, is or was; or
    ii.    Whose immediate family member, in the current or immediate past financial year, is or was,

    a 10% shareholder of, or a partner in (with 10% or more stake), or an executive officer of, or a director of, any organisation to which the company or any of its subsidiaries made, or from which the company or any of its subsidiaries received, significant payments or material services (which may include auditing, banking, consulting and legal services), in the current or immediate past financial year. As a guide, payments5 aggregated over any financial year in excess of S$200,000 should generally be deemed significant;

  5. A director who is a 10% shareholder or an immediate family member of a 10% shareholder of the company; or
  6. A director who is or has been directly associated with6 a 10% shareholder of the company, in the current or immediate past financial year.
The relationships set out above are not intended to be exhaustive, and are examples of situations which would deem a director non-independent. If the Board wishes, in spite of the existence of one or more of these relationships, to consider the director as independent, it should fully disclose the nature of the director's relationship, and bear responsibility for explaining why he should be considered independent.

 

A. Explanation

This Guideline sets out the criteria in determining the independence of a director.

Independence is fundamentally a state of mind. As it is almost impossible for anyone to determine the (future) state of mind of a director, the Guideline sets out proxies or tests of independence.

There are, in effect, two sets of criteria in this Guideline: general and specific.

The general criterion of independence is that “the director is independent in character and judgement and [that there are no] relationships or circumstances which are likely to affect, or could appear to affect, the director's judgement”.

For the specific criterion, the overall caveat is that the independent director “has no relationship with the company, its related corporations, its 10% shareholders or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director’s independent business judgement with a view to the best interests of the company.”

The Guideline provides a list of examples of specific relationships or circumstances that are likely to affect, or could appear to affect, a director’s judgement. This list provides various permutations of the director or his immediate family member being employed, remunerated, or engaged in a business relationship with the company, its related corporations, its management, or its 10% shareholders.

There are several important points to bear in mind about this list of examples:

  1. The list is not exhaustive. For example, Guideline 2.4 sets out a nine-year rule – one of the circumstances when a director could be deemed to be non-independent. These are only examples, and each Board should determine whether there is any circumstance or relationship which might impact a director’s independence – or the perception of his independence – notwithstanding that such a situation is not specifically provided for in the examples (meaning the general criteria applies).
  2. The examples are meant to illustrate likely non-independence. In fact, the Guideline implies that if any of the situations described occurs, the director should be deemed to be not independent in the first place. However, the Board can still consider a director to be independent notwithstanding the existence of any of these situations. However, if it does so, it has to fully disclose the nature of the director’s relationship in the company’s annual report, and why the Board has nevertheless maintained the director to be independent.
  3. The Code draws the following lines on relationship:
    1. Shareholdings in related corporations. A related corporation, meaning a corporation that is the company’s holding company, subsidiary or fellow subsidiary, is treated as an extension of the company for this purpose of determining independence.
    2. Shareholding at 10%. Although the Securities Futures Act defines a substantial shareholder at 5% shareholding, the Code raises the threshold for the independent relationship “because a 10% shareholding confers meaningful rights such as the ability to requisition for a general meeting of the company” (as in Section 176(1) of the Companies Act). A 10% shareholding is also used as a blocking vote for privatisations by way of voluntary delistings (SGX MR 1307).

    3. Immediate family members of the director to include his spouse, child, adopted child, step-child, brother, sister, and parent. This definition follows the SGX-ST Listing Manual.

    4. Past three (financial) years of employment. This cooling-off period avoids conflicts of interests that may arise from the director’s or immediate family member’s affiliation with management and other parties.

Overall, this Guideline emphasises judgement, perception, and disclosure:

  1. Judgement: The NC and the Board are required to determine whether each director is independent in character and judgement and that he has no relationships, or there are no circumstances, that are likely to affect, or could appear to affect, his judgement.
  2. Perception: The Board’s judgement is not just about whether a director is actually independent (a difficult point to prove in most instances) but also whether there could be a perception of non-independence on the part of the director (“… could appear to affect the director's judgement”).
  3. Disclosure: When there could be a doubt about a director’s independence and the Board still decides to declare him as independent, then a full disclosure  of the relationship and why the director is consider independent must be made so that stakeholders can properly understand the nature of the situation and the basis of the decision.

 

B. SGX Disclosure Guide
  1. Is there any director who is deemed to be independent by the Board, notwithstanding the existence of a relationship as stated in the Code that would otherwise deem him not to be independent? If so, please identify the director and specify the nature of such relationship.

  2. What are the Board’s reasons for considering him independent? Please provide a detailed explanation.

 

C. Related Rules and Regulations
  • Section 176(1) of the Companies Act: Convening of extraordinary general meeting on requisition [10% shareholder].
  • SGX MR 1307 and CR 1307: Delisting.
  • SGX MR and CR: Definitions and Interpretation (see “Immediate Family”).

 

D. CG Guides
  • Board Guide 5.10: The Non-Executive Director [Director Duties].
  • NC Guide 3.6: Nomination Process [Nomination and Appointment Process].
  • NC Guide 3.8: Appointment and Election of Directors [Nomination and Appointment Process].
  • NC Guide Appendix 3B-4: Removal of an Independent Director [Nomination and Appointment Process].
  • NC Guide 4.3: Assessment of Independence Status [Director Independence].
  • NC Guide 4.4: Criteria for Independence [Director Independence].
  • NC Guide Appendix 4B-1: Determining Director Independence [Director Independence].
  • NC Guide Appendix 4B-3: Interested Person Transactions Involving Independent Director [Director Independence].
  • NC Guide Appendix 4C: Sample Form for Confirmation of Director’s Independence [Director Independence].

 

E. Related Articles

 

4

The term “related corporation”, in relation to the company, shall have the same meaning as currently defined in the Companies Act, i.e. a corporation that is the company’s holding company, subsidiary or fellow subsidiary.
5

Payments for transactions involving standard services with published rates or routine and retail transactions and relationships (for instance credit card or bank or brokerage or mortgage or insurance accounts or transactions) will not be taken into account, unless special or favourable treatment is accorded.

6

 

A director will be considered “directly associated” with a 10% shareholder when the director is accustomed or under an obligation, whether formal or informal, to act in accordance with the directions, instructions or wishes of the 10% shareholder in relation to the corporate affairs of the corporation. A director will not be considered “directly associated” with a 10% shareholder by reason only of his or her appointment having been proposed by that 10% shareholder.
eGuide to CG Code
Overview
Board Matters
Principle 1
Guideline 1.1
Guideline 1.2
Guideline 1.3
Guideline 1.4
Guideline 1.5
Guideline 1.6
Guideline 1.7
Principle 2
Guideline 2.1
Guideline 2.2
Guideline 2.3
Guideline 2.4
Guideline 2.5
Guideline 2.6
Guideline 2.7
Guideline 2.8
Principle 3
Guideline 3.1
Guideline 3.2
Guideline 3.3
Guideline 3.4
Principle 4
Guideline 4.1
Guideline 4.2
Guideline 4.3
Guideline 4.4
Guideline 4.5
Guideline 4.6
Guideline 4.7
Principle 5
Guideline 5.1
Guideline 5.2
Guideline 5.3
Principle 6
Guideline 6.1
Guideline 6.2
Guideline 6.3
Guideline 6.4
Guideline 6.5
Remuneration Matters
Principle 7
Guideline 7.1
Guideline 7.2
Guideline 7.3
Guideline 7.4
Principle 8
Guideline 8.1
Guideline 8.2
Guideline 8.3
Guideline 8.4
Principle 9
Guideline 9.1
Guideline 9.2
Guideline 9.3
Guideline 9.4
Guideline 9.5
Guideline 9.6
Accountability and Audit
Principle 10
Guideline 10.1
Guideline 10.2
Guideline 10.3
Principle 11
Guideline 11.1
Guideline 11.2
Guideline 11.3
Guideline 11.4
Principle 12
Guideline 12.1
Guideline 12.2
Guideline 12.3
Guideline 12.4
Guideline 12.5
Guideline 12.6
Guideline 12.7
Guideline 12.8
Guideline 12.9
Principle 13
Guideline 13.1
Guideline 13.2
Guideline 13.3
Guideline 13.4
Guideline 13.5
Shareholder Rights and Responsibilities
Principle 14
Guideline 14.1
Guideline 14.2
Guideline 14.3
Principle 15
Guideline 15.1
Guideline 15.2
Guideline 15.3
Guideline 15.4
Guideline 15.5
Principle 16
Guideline 16.1
Guideline 16.2
Guideline 16.3
Guideline 16.4
Guideline 16.5
eGuide Glossary
Disclosure of CG arrangements
The Role of Shareholders

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