1. Introduction to Corporate Governance
Corporate governance refers to the set of systems, principles and processes by which a company is governed.
Within the corporate ecosystem – which includes management, shareholders, auditors, regulators, creditors and other stakeholders – the Board of directors is primarily responsible for the governance of a company.
- The Board appoints and supervises the management of the business and reports to shareholders on their stewardship.
- The management operates the day-to-day business, and is accountable to the Board.
- The shareholders elect the directors, approve the appointment of the auditors, and satisfy themselves that an appropriate governance structure is in place. Where shareholders are dissatisfied with the way the company is governed, they can remove the members of the Board.
Laws and regulations are in place to oversee this closed loop system of governance, and the duties, responsibilities and liabilities of the directors.
The subsequent sections provide the context for corporate governance across the world and Singapore and, especially, for the Singapore Code of Corporate Governance (the “Code”) and the concept of “comply or explain”.
A. CG Guides
- Board Guide 1.1: Introduction [Corporate Governance].
- Board Guide 1.2: Company Performance [Corporate Governance].
- Board Guide 1.3: Regulatory Conformance [Corporate Governance].
- Board Guide 4.1 Introduction [Board Duties].
B. Related Articles
- “Corporate governance: why bother” by Willie Cheng. (446KB)
- “Governance and corporate valuation” by Soh Gim Teik. (452KB)
2. Global Overview of Corporate Governance
The origins of modern corporate governance can be traced to the “principal-agent” problem.
Over time, different approaches and initiatives, including regulations, Board structures and practices, have evolved to address this problem.
The multiplicity of rules and regulations have, however, led to the “conformance versus performance” conundrum about the role of Boards in the governance of companies.
The principal-agent problem
The principal-agent problem began towards the end of the 19th and beginning of the 20th century with the creation of joint stock companies, and with the control of companies shifting into the hands of the managers, effectively separating ownership and control.
In agency theory, the agent represents the principal in a particular business transaction. The agent is expected to represent the principal’s best interests without regard for self-interest.
Problems occur when the interests of a principal and an agent are in conflict. These conflicts can present normally ethical individuals with moral dilemmas. Incentives and disincentives are used so that the agent’s behaviour and interests are redirected and realigned with the principal's.
In the context of a company, the Board is the “agent” of shareholders, and management is the “agent” of the Board. Corporate governance then is about the systems, rules and process that ensure the interests of the various parties are aligned in an open and transparent way.
Contemporary thinking on corporate governance
Contemporary discussions of corporate governance tend to refer to principles and practices raised in the following documents released since 1990:
- The Cadbury Report (UK, 1992): This report sets out recommendations on the arrangements of company Boards and accounting systems to mitigate corporate governance risks and failures. It evolved into the UK Corporate Governance Code (first known as the Combined Code).
- The King Report I, II and III (South Africa, 1994, 2002, and 2009): Listed companies on the Johannesburg Stock Exchange in South Africa are required to comply with the corporate governance requirements of the King Reports which are cited for their leading international practices in corporate governance.
- The G20/OECD Principles of Corporate Governance (1999, 2004, and 2015): The Principles issued by the Organisation for Economic Co-operation and Development (OECD) has been often referenced by countries developing local codes or guidelines. Appendix 1C provides an overview and outline of the Principles.
- The Sarbanes-Oxley Act (US, 2002): Also commonly referred to as SOX, it was introduced in the aftermath of the Enron, WorldCom and other scandals. It was an attempt by the US federal government to legislate several of the principles recommended by the Cadbury and OECD reports.
- The Dodd-Frank Act (US, 2010): This is a compendium of federal regulations, primarily affecting financial institutions and their customers that the Obama administration passed to try to prevent the recurrence of events that caused the 2008 Global Financial Crisis.
German and English corporate laws have evolved two main forms of Board structures.
The German model is a two-tier system with two separate bodies that operate independently: the Executive Board which comprises executive directors who conduct the day-to-day management of the company, and the Supervisory Board which comprises only non-executive directors that govern the company (including hiring and supervising the executive directors and the CEO). This model is adopted in countries such as Germany, the Netherlands, Finland and China.
The English model is a one-tier system with a single unified Board governing the company. Both executive and non-executive directors sit together on the same Board. This model is adopted by Singapore, the UK, the US, and most Commonwealth countries.
Conformance and performance
From the perspective of the Board, the scope of its governance responsibilities should cover two areas:
- Performance: To ensure that the company’s assets are used efficiently and productively, and in the best interests of the company.
- Conformance: To safeguard shareholders’ and other stakeholders’ interests in compliance with existing regulations.
Rules and regulations, including the Code (the subject of this Guide), fall within the conformance role of the Board.
Notwithstanding the myriad and onerous rules and regulations that demand their time, the Board should not, however, ignore the fundamental value creation and performance aspect of its role.
A. CG Guides
- Board Guide 1.1: Introduction [Corporate Governance].
- Board Guide 1.8: Other Jurisdictions [Corporate Governance].
- Board Guide 4.1: Introduction [Board Duties].
B. Related Articles
- “Regulation by law or the code?” by Lyn Boxall. (457.79 KB)
- “One and two-tier governance systems” by Willie Cheng. (446.07KB)
- “Corporate governance in Asian markets” by David Smith. (93KB)
- “Corporate governance developments - UK, Europe, Americas & Asia Pacific” by SID. (214KB)
- “Corporate governance developments - Singapore, Thailand & Worldwide” by SID. (311KB)
- “Corporate governance developments - Asia & Global” by SID. (163KB)
- “Corporate governance developments from around the world” by Annabelle Yip. (146KB)
3. Singapore Regulatory Framework
In the context of Singapore, corporate governance practices can be broadly classified in the following conformance continuum:
- Legislation and subsidiary legislation: Statutes passed by Parliament (for example, the Companies Act) and subsidiary legislation like rules and regulations (for example, Companies (Accounting Standards) Regulations) that companies must adhere to.
- Rules and Codes: Rules and codes issued by a regulatory body under which the company by virtue of membership, statutory duty, or otherwise is subject to (for example, the SGX-ST Listing Rules for a listed company).
- “Comply or explain” requirements: Rules and codes issued by a regulatory body which should be either complied with, or an explanation provided for non-compliance (for example, the Code of Corporate Governance).
- Guidance: Recommendations and guidelines on good practices issued by regulatory or professional bodies (such as SID) that companies are encouraged to voluntarily comply with.
Legislation and subsidiary legislation
Corporate governance practices mandated by legislation are those that are deemed critical and prescribed by the various statutes.
A combination of commercial and other laws applies to companies. Those of concern to listed companies and their directors include:
- The Companies Act (Cap 50). This is the basis by which a company is legally registered/incorporated in Singapore. It contains a significant portion of the legal duties and responsibilities that directors of companies have to observe.
- The Securities and Futures Act (Cap 289). This Act governs all activities pertaining to securities, futures and funds management. Listed companies are specifically included.
- Industry-specific legislation. There are usually one or more pieces of legislations covering each regulated industry, for example, the Banking Act (Cap 20) for the banking industry, and the Telecommunications Act (Cap 323) for telecommunications companies.
- Legislation applicable to all companies operating in Singapore. Directors should be aware of the large number of laws for commercial and other organisations such as the Competition Act (Cap 50B) and the Personal Data Protection Act (Cap 26).
Directors need to be aware of types of the legislation that apply to the companies of the Boards on which they serve. They should be familiar with the duties and disclosure requirements expected of directors. They should seek guidance from the Company Secretary or the respective compliance officers on statutory compliance issues, but they are ultimately responsible for their companies complying with legal obligations.
Rules and Codes
Executive authorities and regulatory agencies may also issue rules and codes which are not statutory in nature. Breaches of such rules and codes could attract non-statutory sanctions such as reprimands and monetary penalties.
An example would be the SGX-ST Listing Rules which include ongoing disclosure obligations and other requirements on the issues of additional securities, major transactions, trading halts and delistings.
Besides the SGX-ST Listing Rules, companies engaging in capital market activities, including fund raising in Singapore, should ensure compliance with other relevant rules and codes. These include:
- The Singapore Code on Takeovers and Mergers.
- The Code of Collective Investment Schemes.
"Comply or explain" codes
“Comply or explain” is a middle ground between mandatory rules and the voluntary adoption of good practices of corporate governance.
Here, the regulator defines the principles and practices of good governance in a code, and companies are required to be transparent in the way that they comply (or do not comply) with them.
From time to time, industry bodies or regulators may issue guidance on leading practices and explain how laws and regulations should be interpreted. Such guidance are not mandatory, but they are useful for companies to understand, review and adopt according to their circumstances.
For example, SID periodically issues succinct and practical Statements of Good Practice on fundamental issues of board performance, accountability and corporate responsibility.
A. CG Guides
- Board Guide 1.3: Conformance [Corporate Governance].
- Board Guide 1.4: Legislation [Corporate Governance].
- Board Guide 1.5: Regulations [Corporate Governance].
- Board Guide Appendix 1E: List of Key Legislations [Corporate Governance].
- Board Guide Appendix 1F: Outline of the Structure and Content of the Companies Act [Corporate Governance].
- Board Guide Appendix 1G: Outline of SGX Listing Rules [Corporate Governance].
- Board Guide Appendix 1H: List of Key Regulations [Corporate Governance].
B. Related Articles
- “Regulation by law or the Code” by Lyn Boxall. (458KB)
- “For compliance’s sake” by Daniel Ee. (457KB)
- “Reinforcing SGX listing and enforcement framework” by Annabelle Yip. (58KB)
- “Keeping on the right side of the law” by Michael Gray. (46KB)
- “Impending changes to the Companies Act” by Koi Moi Lre & Bong Yap Kim. (86KB)
- “Changes in securities regulation” by Chia Kim Huat & Evelyn Wee. (269KB)
- “Amendments to the Companies Act” by Andrew Abraham. (29KB)
- “The evolution of corporate governance in Singapore” by Joyce Koh & Anabelle Yip. (69KB)
4. History of the Singapore Code
The Singapore Code of Corporate Governance follows similar codes issued on a “comply or explain” basis in the UK and other countries.
The Code was introduced in 2001 and updated in 2005 and 2012.
The first Code was introduced by the Corporate Governance Committee in March 2001. It came into effect on 1 January 2003 and applied to all listed companies in Singapore.
In August 2002, the Council of Corporate Disclosure and Governance (CCDG) was formed to prescribe accounting standards, strengthen the framework on disclosure practices and reporting standards, and to review and make recommendations to the Ministry of Finance (MOF) about revisions to the Code.
In 2005, the CCDG reviewed the 2001 Code, and a revised Code was subsequently issued by the MOF in July 2005.
The CCDG was dissolved in 2007 and oversight of corporate governance of listed companies was taken over by the Monetary Authority of Singapore (MAS) and the Singapore Exchange Ltd (SGX). This move clarified and streamlined responsibilities for corporate governance matters for listed companies, bringing it under the sectoral regulator.
The Corporate Governance Council (Council) was established in February 2010 by the MAS to promote among listed companies in Singapore a higher standard of corporate governance. As part of its work, the Council conducted a comprehensive review of the 2005 Code.
In May 2012, following a public consultation and recommendations by the Council, the MAS issued a second revision of the Code. The revisions effected changes in several key areas including director independence, Board composition, multiple directorships, remuneration practices and disclosures, risk management, and shareholders’ rights and role.
The Council was dissolved and an inter-agency committee was formed to carry on the work on corporate governance. Chaired by the MAS, the committee comprises representatives from the SGX and the Accounting and Corporate Regulatory Authority (ACRA).
A. CG Guides
- Board Guide 1.1: Introduction [Corporate Governance].
B. Related Articles
- “The evolution of corporate governance in Singapore” by Joyce Koh & Annabelle Yip. (69KB)
- “At the forefront of corporate governance in Asia – Singapore strengthens its corporate governance regime” by Jerry Koh & Jane Ng. (114KB)
- “Winds of change over the corporate governance landscape” by Adrian Chan. (102KB)
- “The Singapore Code of Corporate Governance – its evolution” by Adrian Chan. (89KB)
- “Developments in governance: revisions to the Singapore Code of Corporate Governance” by Annabelle Yip. (101KB)
5. “Comply or explain”
The Code of Corporate Governance applies to all listed companies in Singapore on a “comply or explain” basis. This means that companies must either comply with the principles and guidelines contained in the Code, or explain why there is a non-compliance.
The “comply or explain” approach was first introduced in the Cadbury Code of 1992. Since then, it has been adopted by many governance codes in Europe and Commonwealth countries.
Singapore adopted it when the Code of Corporate Governance was introduced in 2001, which became operational in 2003. The Code has since been updated twice, in 2005 and in 2012.
The “comply or explain” approach is often contrasted with the more prescriptive approach of legislated rules found in the Sarbanes-Oxley Act of 2002 (SOX) and Dodd-Frank Act of 2010 in the US, which rely largely on legislation and penalties of fines and imprisonment.
The rationale for the approach is simply that principles and practices of good governance are defined by the regulator, and companies should be transparent in how they comply (or do not comply) with them. A departure from a code provision is not presumed to be a breach. Rather, the accompanying explanations by the companies should provide insights into how companies think about improving their corporate governance.
The benefits of the “comply or explain” approach are:
- Proportionality. It means not imposing mandatory requirements that may be excessively burdensome and costly especially for the smaller companies. Companies just need to argue their case as to why they are unable to comply.
- Flexibility for companies. It avoids the disadvantages of a "one size fits all" solution that may not be appropriate when companies are different in size, maturity, pedigree and industry. While it encourages companies to follow the practices laid out in the Code, it allows the company to decide how to best implement them in a way that fits its specific culture and circumstances.
- Flexibility for regulators. It enables standards that are more aspirational than legislation or regulations which tend to impose the minimum requirements. By avoiding unjustified or disproportionate burdens on those being regulated, a “comply or explain” approach sets out market-leading practices and encourage the rest to aspire to the standards of the best. It also encourages good practices in relation to “softer” issues such as training and support for directors which may be inappropriate for regulations or legislation to prescribe as minimum requirements.
- Innovation. By recognising that alternative approaches are justifiable if they can achieve equally good governance and by allowing for alternative approaches and new ideas, “comply or explain” encourages both companies and regulators to be innovative and to introduce leading or new ideas.
- Long-term learning. By regularly thinking through how best to address the purpose and principles of corporate governance, the hope is that companies will internalise these principles and act out of their own will and long-term self-interest rather than being forced to change through defined rules. In a complex area like corporate governance, this can be a more effective approach.
Making “comply or explain” work
For “comply or explain” to work, there must be trust in the corporate governance ecosystem. All players and stakeholders need to do their part.
- Regulators. The role of the regulator is to frame principles and guidelines, and periodically update them to ensure their continued relevance while continually monitoring compliance with the Code. It should question, nudge and engage with companies whose levels of non-compliance are unsatisfactory. Large-scale and persistent non-compliance can become an issue that requires urgent attention. Should such non-compliance be extensive, one of the options is to convert the guidelines of the Code into mandatory listing rules or even enshrining it in legislation.
- Boards. Companies and their Boards need to commit to good governance and seek to comply with the Code’s requirements. They should not regard the Code as a necessary evil. Rather, they need to look at the bigger picture of the goal – good governance practices that all companies should implement for theirs and all stakeholders’ longer term interests.
- Investors. Shareholders benefit the most from good corporate governance. They too must share some responsibility beyond just receiving reports and making self-interested investment decisions. They can help companies improve their governance standards by scrutinising the companies' level of compliance and raising relevant questions at the AGM and other appropriate forums. Institutional investors, in particular, have the means to more actively and substantively engage companies about their practices.
- Other players. Other players such as the media, shareholder associations, trade bodies and industry watchers should all work to promote compliance with the Code and to foster good corporate governance. SID, for one, works actively in this regard through education, advocacy, corporate governance scorecards and awards.
Complying with “comply or explain”
Companies need to either comply with the Principles and guidelines in the Code or explain adequately their non-compliance in their annual report.
There is a mistaken view that the Code is “voluntary” in nature since companies can choose to comply or not.
In fact, the "comply or explain" aspect of the Code is effected through the SGX-ST Listing Manual which is mandatory, not optional. Specifically, a company is required to "describe its corporate governance practices with specific reference to the principles of the Code in its annual report [and] it must disclose any deviation from any guideline of the Code together with an appropriate explanation for such deviation in the annual report" (Rule 710 of the SGX Mainboard Rules and Rule 710 of the Catalist Rules).
Read closely, this provision has two requirements.
The first is that the adoption of guidelines of the Code is preferred, almost required, even if they are not explicitly compulsory. The regulator wants companies to adopt the good practices embedded in the Code unless they cannot.
And when they cannot, the second requirement is that the non-compliance must be justifiable – or, as the rulebook puts it, "the deviation" from the Code must be "appropriately" explained.
Explanations by companies of their non-compliance are sometimes inadequate. An adequate explanation of non-compliance should have the following characteristics:
- Explanations should apply to deviations from the guidelines of the Code, not to deviations from its main principles, which companies are expected to adhere to.
- The explanation for non-compliance should be substantive not perfunctory, and where appropriate, details of the alternative approach should be provided.
- Such explanations need to be specific to the company’s position, not through boilerplates.
- A meaningful explanation needs to:
- Set the context and historical background.
- Provide a convincing rationale for the action which the company is taking.
- Describe mitigating action to address any additional risk and to maintain conformity with the relevant principle.