Corporate Governance Beyond Box-Ticking

Transcription

1 Corporate Governance Beyond Box-Ticking Mak Yuen Teen Regional Research Director for Asia Pacific, Watson Wyatt Worldwide Co-Director, Corporate Governance & Financial Reporting Centre Dinner Talk, 8 April 2008 Organised by CPA Australia and the Institute of Certified Public Accountants of Singapore 1

2 Box Ticking in Corporate Governance Causes of box ticking Inadequate understanding/apathy Legalistic approach to corporate governance Comply or else perception 2

3 Box Ticking in Corporate Governance Symptoms of box ticking standard boilerplate corporate governance report drafting of corporate governance report is outsourced to law or PR firm corporate governance report is not reviewed by the board or a board committee no formal process used by board or board committee to assess application of the Code 3

4 Box Ticking in Corporate Governance Regulators, directors, market professionals and investors have all contributed to box ticking culture Comply [with Guidelines] or Explain [Deviations] vs Apply [the Principles] and Explain [the Practices]? 4

5 Principle 1:The Board s Conduct of Affairs Principle 1: Every company shall be headed by an effective Board to lead and control the company. The Board is collectively responsible for the success of the company. The Board works with Management to achieve this and the Management remains accountable to the Board. 5

6 Principle 1:The Board s Conduct of Affairs What is required of an effective board? directors who have Character, Competencies and Commitment board has a clear understanding of its roles and responsibilities viz-a-viz management board delegates clearly according to the circumstances of the company, supervises the delegation and holds the delegate accountable (board s reserved powers ) 6

7 Principle 1:The Board s Conduct of Affairs What is required of an effective board? board sets the example in values and standards board spends time in discussing and making decisions 7

8 Principle 1:The Board s Conduct of Affairs Examples of Reserved Powers of the Board* Approval of vision, mission, values statement and code of ethics Recommendation to appoint/change auditors Approval of remuneration of auditors Approval of auditors engagement letter Review of auditors recommendations and observations Approval of all announcements, circulars and other documents, including those required by any stock exchange to be sent to shareholders Approval of press releases on matters decided by the Board Approval/review of interested party transactions 8

9 Principle 1:The Board s Conduct of Affairs 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 * Some powers could be delegated to board committees 9

10 Principle 1:The Board s Conduct of Affairs A word about meetings provision for telephonic and videoconference meetings is encouraged by the Code but they are not always suitable abuse of attendance and attendance fees only about 1 in 10 boards meet at least 6 times per year is this enough? 10

11 Principle 2: Board Composition and Guidance Principle 2: There should be a strong and independent element on the Board, which is able to exercise objective judgement on corporate affairs independently, in particular, from management. No individual or small group of individuals should be allowed to dominate the Board s decision making. 11

12 Principle 2: Board Composition and Guidance An independent director is one who has no relationship with the company, its related companies or its officers that could interfere, or be reasonably be perceived to interfere, with the exercise of the director s independent business judgement with a view to the best interests of the company (Guideline 2.1) 12

13 Principle 2: Board Composition and Guidance NC s assessment of independence Rules-based approach NC confirms that director is not caught by one of the 4 relationships in 2.1 (or explains it away without due consideration of market perception) 13

14 Principle 2: Board Composition and Guidance Principles-based approach NC: Determines whether the director is caught by one of the 4 relationships in 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) Considers the director s behaviour in the boardroom does he/she actually display independent character and judgement? 14

15 Principle 2: Board Composition and Guidance NC s assessment of its strengths and weaknesses (core competencies) What are the current competencies on the board? What are the most critical competencies on the board? Where are the gaps? 15

16 Principle 3: Chairman and Chief Executive Officer Principle 3: There should be a clear division of responsibilities at the top of the company the working of the Board and the executive responsibility of the company s business which will ensure a balance of power and authority, such that no one individual represents a considerable concentration of power. 16

17 Principle 3: Chairman and Chief Executive Officer 58% have separate Chairman and CEO but they are often related or Executive Chairman/MD situation; only 13% have an independent Chairman Considered one of the most important practice by institutional investors (see recent Mark & Spencer episode in U.K.) Companies which do not effectively separate the roles need to do more to assure shareholders about what checks and balances they have in place 17

18 Principle 4: Board Membership Principle 4: There should be a formal and transparent process for the appointment of new directors to the Board. 18

19 Principle 4: Board Membership 1 in 5 companies make some form of disclosure of the process Independent board searches (e.g., using recruitment firms and advertisements) are extremely rare Many directors (including independent directors serving on nominating committees) are still uncomfortable with bringing in people who are unfamiliar to them 19

20 Principle 5: Board Performance Principle 5: There should be a formal assessment of the effectiveness of the Board as a whole and the contribution of each director to the effectiveness of the Board. 20

21 Principle 5: Board Performance Need clear understanding of the roles of the board and assessment should be tied to these roles Feedback from management? Feedback from key shareholders? Use of external party? Annual versus less regular assessments? Benchmarking to other boards? What is done with the results of assessment? 21

22 Principle 6: Access to Information Principle 6: In order to fulfil their responsibilities, Board members should be provided with complete, adequate and timely information prior to board meetings and on an ongoing basis. 22

23 Principle 6: Access to Information Boards need to be proactive in seeking information from management, including on: key risk metrics forward-looking, non-financial and exception information Board s independent access to senior management. Should individual directors have such access, or should it be the Board as a whole or only through the Board? 23

24 Principle 6: Access to Information Long-term shareholder value Value drivers Historical Information Forward-looking Financial Non-financial Qualitative Routine Exception 24

25 Principle 7: Procedures for Developing Remuneration Policies Principle 7: There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors. No director should be involved in deciding his own remuneration. 25

26 Principle 7: Procedures for Developing Remuneration Policies CEO pay remuneration committee or board to approve? (Code assumes it is the board) Are all benefits-in-kind given to directors and CEOs considered by the RC as the Code intended? Director emoluments to be approved by shareholders under s169. Are companies complying with the spirit? Separate consulting fees paid to directors? (s169 any benefits received by him otherwise than in cash in respect of his services as director ) 26

27 Principle 8: Level and Mix of Remuneration Principle 8: The level of remuneration should be appropriate to attract, retain and motivate directors needed to run the company successfully but companies should avoid paying more than is necessary for this purpose. A significant proportion of executive directors remuneration should be structured so as to link rewards to corporate and individual performance. 27

28 Principle 8: Level and Mix of Remuneration Is performance generally corporate rather than individual? Over-reliance on profits and TSR? (where is risk?) Do options with vesting schedule create long-term incentives? Should there be negative bonuses for exceptionally poor performance? Entrenched market practices and CEO bargaining power limit ability to change remuneration schemes 28

29 Share Options: Long-Term or Short-Term Incentives? Numbe r of unveste d options Alternative methods of option vesting Vesting period of options (Years) 29

30 Principle 8: Level and Mix of Remuneration Yr 1 profit Yr 1 bonus (5%) Yr 2 profit Yr 2 bonus (5%) Yr 3 profit Yr 3 bonus (5%) Total profit Total bonus $1m $50k $1.5m $75k $2m $100k $4.5m $225k $2.5m $125k -$1.5m $0 $2m $100k $3m $225k 30

31 Principle 8: Level and Mix of Remuneration Restructuring NED fees? Practice has moved from basic fees, to basic fees plus additional fees for additional responsibilities and commitments Need for wider differentials between Chairman and average NED fees in some cases? Differentiate fees for individual directors based on market value? (e.g., US director versus Singaporean director?) Drop attendance fees and set minimum attendance expectations instead? 31

32 Principle 9: Disclosure on Remuneration Principle 9: Each company should provide clear disclosure of its remuneration policy, level and mix of remuneration, and the procedure for setting remuneration in the company s annual report. It should provide disclosure in relation to its remuneration policies to enable investors to understand the link between remuneration paid to directors and key executives, and performance. 32

33 Principle 9: Disclosure on Remuneration Few companies disclose metrics (KPIs) for their CEO and executive directors (let alone targets) Band disclosure why disclose by bands of $250k when CEO earns millions? $500k or more disclosure by companies Disclosure of metrics and thresholds for annual bonuses is common in IPO prospectuses but rare after IPO 33

34 Principle 10: Accountability Principle 10: The Board should present a balanced and understandable assessment of the company s performance, position and prospects. OFR disclosures, especially in areas of key drivers (financial and non-financial), risks and risk management strategies, indications of earnings prospects and plans, and discussion and explanation of critical accounting policies and estimates could be improved 34

35 Principle 11: Audit Committee Principle 11: The Board should establish an Audit Committee ( AC ) with written terms of reference which clearly sets out its authority and duties 35

36 Principle 11: Audit Committee Are boards too liberal in interpreting accounting or related financial management expertise or experience? 50.00% 45.00% 40.00% IDs with accounting/finance backgrounds 46.30% 35.00% 31.64% Percentage 30.00% 25.00% 20.00% 19.16% 15.00% 10.00% 5.00% 0.00% 2.47% 0.44% no ID 1 ID 2 IDs 3 IDs 4 IDs 36

37 Principle 11: Audit Committee Breakdown of ACs by presence of lawyers Percentage 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 51.67% ACs with no lawyers 42.38% ACs with 1 lawyers 5.22% ACs with 2 lawyers 0.73% ACs with 3 lawyers 37

38 Principle 11: Audit Committee Percentage of AC with lawyers chairman Percentage % 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 91.15% ACs without lawyers as chairman 8.85% ACs with lawyers as chairman 38

39 Principle 12: Internal Controls Principle 12: The Board should ensure that the Management maintains a sound system of internal controls to safeguard the shareholders investments and the company s assets Only 31% of companies include a statement by the board on adequacy of internal controls, including financial, operational and compliance controls and risk management policies and systems established by management 39

40 Principle 12: Internal Controls In 2005, SGX proposed to require an annual confirmation from the Board and CEO that: a. responsibilities for staffing internal control functions are explicitly assigned; b. procedures exist for assessing the effectiveness of the company's internal controls; c. channels for reporting significant risk and internal control matters to the Board and CEO are clearly specified; and d. nothing has come to the attention of the Board and CEO with regards to internal controls that would have a materially adverse effect on the company. This was abandoned. Why? Isn t this a minimal 40

41 Principle 13: Internal Audit Principle 13: The company should establish an internal audit function that is independent of the activities it audits 41

42 Principle 13: Internal Audit Significant increase in emphasis on internal audit and improvement in stature of internal auditor Should internal audit be mandatory for listed companies? About 20% disclosed that their internal auditor meets standards set by recognised professional bodies. Should there be more control over the meaning of internal audit? 42

43 Principle 14: Communication with Shareholders Principle 14: Companies should engage in regular, effective and fair communication with shareholders Companies should make greater use of technology to communicate with shareholders Include more corporate governance and other information on the website 43

44 Principle 15: Communication with Shareholders Principle 15: Companies should encourage greater shareholder participation at AGMs, and allow shareholders the opportunity to communicate their views on various matters affecting the company Proper proxy voting should be introduced for all companies Two proxies rule must be addressed 44

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