Friday, October 05, 2012

Singapore Central Bank Chief Says Disclosure is Key to Effective Compy or Explain Corporate Governance Codes

Meaningful disclosure is the key to an effective comply-or-explain corporate governance code, said the Managing Director of Singapore’s Monetary Authority. In remarks at the Asian Corporate Governance Conference, Ravi Menon said that in order to retain the flexibility to deviate from corporate governance these expectations when particular circumstances warrant it, companies must explain publicly the reasons for any such deviations from a comply-or-explain code so that the market can judge.

Unfortunately, said the official, disclosures being made by companies deviating from the Singapore Corporate Governance Code are often uninformative. For example, a company that did not have independent directors making up at least one-third of the board offered the explanation that the board believes that there is an independent element on the board and that  it is able to exercise independent judgment on corporate affairs. This statement does not provide any  evidence or information to shareholders on how the independent element is achieved in spite of the smaller number of independent directors.

The central banker advised companies to provide meaningful explanations of their reasons for deviation, and not opt for  template disclosures that shed no light on these reasons, or worse, obfuscate the issue. But he added that there is scope for standardizing the format in which disclosures of compliance with key principles in the Code are made, in order to facilitate comparability across listed companies. The MAS will be exploring this in the coming months.

In addition to strengthening market discipline through disclosure, shareholders can play an important role in enhancing corporate governance by studying corporate statements, attending general meetings, and voting on key issues. But the reality is that too often companies have limited engagements with shareholders on governance issues, and most institutional investors do not vote or attend annual meetings.

A second area where corporate governance can be enhanced is in raising the competency levels of boards. Corporate governance reforms have focused on addressing the principal-agent problem chiefly through strengthening the independence of boards. This is necessary, said the official, but not sufficient. Good director must not only be independent in form, but must also be competent so that they can also be independent in substance. Directors must be able and willing to devote time to their roles and have the relevant experience to question management and form independent views on strategy, risk, and performance.

This is particularly relevant in the area of risk management, emphasized the Managing Director, where boards have an important role to play in determining the company’s risk tolerance and risk policies. They must oversee management in designing, implementing, and monitoring the company’s systems for managing risk.  Since risk is fundamentally about uncertainty and is therefore inherently subjective, a diverse Board with both executive and independent directors as well as a variety of backgrounds and expertise is key. Given the complexity of the environment, only through robust debate and rigorous consideration of the range of possibilities can voards make sound decisions on risk and strategy.

Finally, corporate governance must be about instilling a culture that places values above profits. Publicly listed companies are increasingly at risk of becoming slaves to the pressures of quarterly earnings. In a brutally competitive environment, this short-termism promotes not only excessive risk-taking but a variety of sharp practices, exploitative sales, and even fraudulent transactions. Boards and senior management have a critical role in promoting a culture rooted in strong ethical frameworks. They must make clear that serving the customer’s interest, dealing fairly with suppliers and counterparties, following the laws of the land, and not placing the larger society at risk are essential for maximizing long-term shareholder value.

Restoring ethical conduct is particularly relevant for the financial industry. Following the crisis, the industry has fallen into disrepute. Public trust that is critical to not just the growth but the viability of financial institutions. The leadership of financial institutions, Boards and senior management, owe a special duty of care to ensure that finance is trustworthy, socially redeeming, and economically purposeful. This is an area that MAS intends to engage the Boards and senior management of financial institutions on