Improving the substance of corporate governance
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Improving the Substance of Corporate Governance. Mak Yuen Teen. SIAS Corporate Governance Conference, 8 October 2008. Redefining Corporate Governance?.

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Improving the Substance of Corporate Governance

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Improving the Substance of Corporate Governance

Mak Yuen Teen

SIAS Corporate Governance Conference, 8 October 2008

Redefining Corporate Governance?

Corporate governance refers to having the right people, structure and processes to direct and manage the company, in order to enhance its long-term value, through enhancing performance, accountability and risk management. It is about empowering management, while ensuring that there is adequate oversight and accountability.

Redefining Corporate Governance?

  • Having the right people is as (more?) important as structure and processes

  • Robust risk management is critical to good corporate governance (and may be undermined by design of “pay for performance” schemes)

  • The board should not micro-manage

Keys to Improving Substance

  • To improve substance, the board must:

    • believe in accountability

    • take responsibility for governance

    • seek continuous improvements

    • incorporate good governance principles into everything it does

1. Setting the Tone at the Top

  • Hold directors and senior management to the highest ethical standards

    • having a code of conduct or ethics for directors and senior management is a good start

    • enforcing ethical standards on directors and senior management is critical

2. Building an Effective Board

  • Rigorous processes should be followed in:

    • recruiting the right directors, which involves assessing current mix of skills and backgrounds of directors against the desired mix, and having a robust process for identifying and selecting candidates

      • diversity in competencies and backgrounds is valuable provided it’s not “tokenism” (e.g., specialists/generalists, CEOs/non-CEOs, local/foreign directors, gender, races, private/public/non-profit, etc.)

Foreign Directors: Pros and Cons

  • Pros:

    • knowledge of overseas market in which company has a listing or significant business

    • not part of “old boys’ network” so better able to express dissenting views

    • influence the board to adopt international good practices

  • Cons

    • lack of knowledge of local laws and practices

    • difficulty in actively contributing to board and committee work

    • difficulty in paying them adequate fees or may lead to fee escalation for entire board if no policy on differential fees for foreign directors

2. Building an Effective Board

  • Rigorous processes should be followed in:

    • inducting and developing directors

    • assessing independence of independent directors to ensure that they are independent in substance, continue to be so, and likely to be perceived to be so

    • assessing board and director performance to ensure that the board and individual directors are in fact adding value

Induction of Directors

  • In the UK, the Institute of Chartered Secretaries and Administrators (ICSA) has published a guidance note on “Induction of Directors” (, divided into:

    • essential information to be provided immediately (directors’ duties, company’s business, board issues);

    • additional material to be provided within the first few months

    • additional information which the company secretary might consider making the director aware of

Assessing Director Independence

  • “Principles-based” approach to assessment of independence by the NC:

    • determines whether the director is caught by one of the 4 relationships in guideline 2.1

    • considers whether there is any other relationship or factor which may influence the director’s ability to act independently (e.g., long tenure, interlocks)

    • considers the director’s actual behaviour

    • carefully explains why director is deemed independent where threats to independence exist

Assessing Board and Director Performance

  • A typical board assessment questionnaire may cover:

    • board structure, roles and responsibilities

    • board meeting processes

    • board culture and relationships

    • board’s access to information and management

    • board’s involvement in strategy and planning

    • board’s involvement in monitoring

  • Committee performance should also be assessed

Assessing Board and Director Performance

  • Some key issues:

    • Feedback from management

    • Feedback from key shareholders

    • Use of external party

    • Simple annual, plus more comprehensive less regular, evaluations

    • Quantitative vs qualitative

    • Benchmarking to other boards

    • Using the results of assessment

3. Board-Management Relationship

  • Board and management must have a good working relationship but without becoming too close

  • Board and management must have clear understanding of their respective roles and responsibilities

  • Board should delegate clearly, have clear reserved powers and supervise its delegation

3. Board-Management Relationship

  • Supervising delegation requires the board to be pro-active in asking questions and seeking information

  • Certain reserved powers can be delegated to board committees but this should be explicit

  • Beware of board committees over-reaching into management

Examples of Reserved Powers of the Board

  • Approval of vision, mission, values statement, code of ethics and strategic plan

  • Recommendation to appoint/change auditors

  • Recommendation on the remuneration of auditors

  • Approval of auditors’ engagement letter

  • Review of auditors’ recommendations and observations

  • Approval of all circulars and other documents, including those required by the stock exchange to be sent to shareholders

  • Approval of press releases on matters decided by the Board

  • Approval/review of interested party transactions

Examples of Reserved Powers of the Board

  • Approval of interim and final accounts and reports

  • Approval of interim dividends and recommendation of a final dividend

  • Approval of all significant changes in accounting policies and practices

  • Approval of budget

  • Approval of all changes to the organisation of senior management

  • Approval of CEO remuneration and policy

  • Approval of individual items of expenditure in excess of a stated amount

4. Internal Control and Risk Management

  • An internal control system should include at least the following:

    • explicit assignment of responsibilities for internal control

    • procedures for assessing the effectiveness of internal controls

    • reporting of significant risk and internal control matters to the Board and CEO

    • whistleblowing arrangements

4. Internal Control and Risk Management

  • According to the ASX recommendations, a sound risk management system should include:

    • policies on risk oversight and management, which clearly describe roles and accountabilities

    • policies which cover oversight; risk profile; risk management; compliance and control; and assessment of effectiveness

    • the board’s oversight of establishment and implementation of the risk management system, and review of its effectiveness at least annually

4. Internal Control and Risk Management

  • risk profile should cover material financial and non-financial risks, and should be regularly reviewed and updated

  • management’s responsibility for establishing and implementing a system for identifying, assessing, monitoring and managing material risk throughout the organisation

  • means of analysing the effectiveness of its risk management system and effectiveness of implementation

5. Executive and Director Pay

  • There is often an over-reliance on cash bonuses based on annual profits and stock options to “pay for performance”

  • Such “pay for performance” schemes encourage senior executives to take on more risk without bearing the full consequences (they have asymmetric payoffs)

  • Relative TSR also does not properly account for risk

Annual Cash Bonuses

5. Executive and Director Pay

  • Is it time for risk-adjusted measures to be used for rewarding CEOs? (but CEOs have considerable power in influencing pay level and policy)

  • Different pay for performance schemes may be appropriate for different types of companies and for different senior executives within the company

  • Stock options are generally inappropriate for NEDs

5. Executive and Director Pay

  • May need to consider raising premiums for chairmen relative to NEDs in Singapore

  • NED fees are too low for some companies but may be reaching competitive levels for larger companies

  • Attendance fees may be starting to create dysfunctional incentives in some companies


Slides can be downloaded from

email: [email protected]; [email protected]

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