MAS Enhances Corporate Governance For Banks And Insurers Introduction...1 Regulations...1 On 8, the Monetary Authority of Singapore ( MAS ) issued two sets of regulations on corporate governance. These comprise the Insurance (Corporate Governance) Regulations 2005 ( Insurance Regulations ) and the Banking (Corporate Governance) Regulations 2005 ( Banking Regulations) (collectively, the Regulations ). At the same time, the MAS also issued a set of Guidelines on Corporate Governance ( Guidelines ) which will apply to banks, financial holding companies and direct insurers which are incorporated in Singapore. The issuance of these instruments was first proposed in February 2003 when a draft set of Regulations and Guidelines were issued for public consultation. The finalised instruments take into account the feedback received by the MAS as well as extensive consultations with the industry. Guidelines...3 Implementation...6 Please feel free to contact the Knowledge & Risk Management Group at eoasis@rajahtann.com Introduction On 8, the Monetary Authority of Singapore ( MAS ) issued two sets of regulations on corporate governance. These comprise the Insurance (Corporate Governance) Regulations 2005 ( Insurance Regulations ) and the Banking (Corporate Governance) Regulations 2005 ( Banking Regulations) (collectively, the Regulations ). At the same time, the MAS also issued a set of Guidelines on Corporate Governance ( Guidelines ) which will apply to banks, financial holding companies and direct insurers which are incorporated in Singapore. The issuance of these instruments was first proposed in February 2003 when a draft set of Regulations and Guidelines were issued for public consultation. The finalised instruments take into account the feedback received by the MAS as well as extensive consultations with the industry. Together, the Regulations and Guidelines enhance existing corporate governance requirements for such entities. The Regulations stipulate minimum corporate governance standards for banks, financial holding companies and significant insurers incorporated in Singapore. Accordingly, they are mandatory. On the other hand, the Guidelines are best practice guidelines applicable to banks, financial holding companies and direct insurers. Adoption is strongly encouraged although not mandatory. Compliance to the Guidelines, however, will be monitored by way of requiring these institutions to publicly disclose their corporate governance practices and to explain deviations from the Guidelines. Institutions listed on the Singapore Exchange should make disclosure in their annual reports for AGMs held from 1 January 2007 onwards. Those that are not listed on the Singapore Exchange should make such disclosure on their websites. The Guidelines and Regulations will be examined in more detail below. Regulations As noted above, the Regulations impose a set of minimum requirements for corporate governance. In brief, the main requirements deal with: composition of the board of directors; Page 1
separation of roles for the chairman of the board and chief executive officer; and establishment, composition and responsibilities of various board committees. The Banking Regulations will apply to all banks incorporated in Singapore while the Insurance Regulations will apply to direct life insurers incorporated in Singapore with total assets of at least S$5 billion in their Singapore Insurance Fund and Offshore Insurance Fund (referred to for the purposes of this section Regulations collectively as Institutions ). Composition Of The Board Of Directors The composition of the board must meet the requirements prescribed in the Regulations: a majority of the board must be independent from any relationship with the bank / significant insurer; a majority of the board must be independent of any single substantial shareholder; and one-third must be wholly independent. Independence is generally defined as independence from relationships, as well as independence from substantial shareholders. It will include independence both from the Institution as well as its subsidiaries. In respect of the latter, the MAS has recognised that a director who is employed by the parent of, or another subsidiary of the parent of, the financial institution, can be considered independent of the management of the financial institution, as there is no apparent motivation for the director to act in the interest of the financial institution s management. However, the MAS has also indicated that it would regard such a director to be not independent of substantial shareholders of the financial institution as he is obliged to act in the interest of the parent company of which he is an employee. Conversely, MAS has stated that while it is necessary for the board of a parent company to exercise adequate oversight of the activities of the subsidiary, the board of the subsidiary financial institution should retain its corporate governance responsibilities for itself, including maintaining its own financial soundness and protecting the interests of its depositors and policyholders. However, as there are circumstances where the interest of the subsidiary and parent company are aligned, in such circumstances, members on the board of the subsidiary who are concurrently directors or executives of the parent company will be considered independent of substantial shareholders. Separation Of Roles For Chairman And CEO To help ensure appropriate oversight of the decision-making process, the Regulations require the separation of the roles of Chairman and Chief Executive Officer ( CEO ). This requirement of separation of roles was present in the first draft of the Regulations for public consultation and it was considered that it would provide an appropriate balance of power, increased accountability and greater capacity of the board for independent decision making. At the suggestion of a respondent, the MAS has included the additional requirement that the Chairman should also be a non-executive director. The MAS has noted that this will prevent the situation where the executive Chairman becomes the de facto CEO of the financial institution. An affected financial institution is not required to revoke any appointment of its Chairman or CEO made before these Regulations came into effect or any subsequent reappointment of such Chairman or CEO in the same office. However, in these circumstances, the Guidelines suggest an additional check of the appointment of a lead independent director. More information on this is set out below under the section headed Chairman And Chief Executive Officer. Establishment, Composition And Responsibilities Of Various Board Committees The Regulations also set out the establishment, composition and responsibilities of various board committees, namely, the Nominating Committee, Remuneration Committee, and Audit Committee. These are as follows: for a Nominating Committee: independent from relationships with the o at least one-third of independent directors; and independent from any single substantial shareholder of the for the Remuneration Committee: independent from relationships with the o at least 3 members of the board of directors of the Page 2
independent from relationships with the o at least one-third of independent directors; and independent from any single substantial shareholder; and for the Audit Committee: o at least three members of the board of directors all of whom are independent from management and business relationships with the and independent directors. The responsibilities of each of the committees above are also set out under the Regulations. This is discussed further under the various sections below headed Board Membership, Board Performance, Remuneration and Accountability And Audit. Penalties For Breach A failure to comply with the Regulations will subject the bank / significant insurer to a fine of up to S$25,000, and if the offence continues, a fine for each day of the continuing offence of up to S$2,500. Guidelines The Guidelines apply to all banks, financial holding companies and direct insurers which are incorporated in Singapore (referred to for the purposes of this section Guidelines collectively as Institutions ). Effective Board The Guidelines call for the board of the Institution to play a critical role in the operation and management of the Institution. Accordingly, it describes the board s role as: providing entrepreneurial leadership, setting strategic aims and ensuring that the necessary financial and human resources are in place for the company to meet its objectives; establishing a framework of prudent and effective controls which enables risk to be assessed and managed; reviewing management performance; and setting the company s values and standards and ensure that obligations to shareholders and others are understood and met. Key aspects of fulfilling this role involve: meeting regularly (whether physically or by telephone or videoconference); setting out clear organisational structures as well as the role, responsibilities, accountability and reporting relationships of management; appointing and removing management; formulating policies and processes to promote fair practices and high standards of business conduct by staff. The Guidelines see the board as being in a sense the conscience and moral barometer of the Institution. Accordingly, it is from the board that the Institution obtains its corporate values and these should promote, integrity, honesty and proper conduct at all times. To enable the board to fulfil this role, board members should achieve appropriate training. For new members, training should cover directors duties, the company s business, its governance practices and, if necessary, accounting, legal and industry-specific knowledge. Training must also be on a continuing basis, and board members should therefore be kept updated on relevant new laws and regulations, and changing commercial risks; Board Composition And Guidance The Guidelines set out various principles for determining the composition of the board. This involves ensuring: a board size capable of effective decision making bearing in mind the scope of the Institution s business; a mix of competencies in core areas of accounting or finance, business or management experience, industry knowledge, strategic planning experience and customerbased experience or knowledge; and independence from management. The rules for establishing independence are the same as those set out in the Regulations and have been discussed above in the section headed Composition Of The Board Of Directors. To ensure that there are an effective check on management, non-executive directors are encouraged: to challenge constructively and to help develop proposals on strategy; to review the performance of management in meeting agreed goals and objectives and monitor the reporting of performance; and to meet regularly without management present. Page 3
Chairman And Chief Executive Officer A key principal, mentioned both in terms of board composition and under the rubric of appointing a chairman and CEO is ensuring that there is a balance of power and authority. Accordingly, to be avoided is a considerable concentration of power in the hands of any one individual or group of individuals. The chairman and the CEO play a critical role in any Institution. Accordingly, the Guidelines reiterate the requirement in the Regulations that these roles should not be undertaken by the same person. This has been discussed above in the section headed Separation Of Roles For Chairman And CEO. The Guidelines also propose an additional check: a lead independent director. Under the Regulations, a carve-out was provided for Institutions where the same person is both chairman and CEO. For such Institutions, it will be helpful to appoint a non-executive independent director to fulfil this role. Such an appointment will also be useful where the chairman and the CEO are related by close family ties, or where the chairman and the CEO are both part of the executive management team. Shareholders should be able to contact the lead independent director about their concerns where such concerns have not been resolved through contact with the chairman, CEO or finance director, or where it would be inappropriate to raise such concerns through these channels. The role of the chairman is also explained in the Guidelines which provide that he should: lead the board to ensure its effectiveness on all aspects of its role and set its agenda; ensure that the directors receive accurate, timely and clear information; ensure effective communication with shareholders; encourage constructive relations between the board and management; facilitate the effective contribution of non-executive directors in particular; encourage constructive relations between executive directors and non-executive directors; and promote high standards of corporate governance. Board Membership The appointment of new directors should be undertaken through a formal and transparent process. In this respect, clear and detailed guidelines have been provided for the Nominating Committee in the making of such appointments and re-nominations. In addition to dealing with such matters of procedure, the Guidelines charge the Nominating Committee with the responsibility for ensuring that each candidature for directorship is fit and proper, and qualified for the office and hence gives it a central role in determining: suitability for re-nomination; independence of directors; and whether multiple board representations will hinder a director s ability to adequately fulfil his role in the board. The importance of succession planning for the board and the CEO in ensuring continuity of leadership is also emphasised. Board Performance The Guidelines require the formal assessment of the effectiveness of the board as a whole. Accordingly, the Nominating Committee is required to implement a process for carrying out this assessment. Essential to this will be setting performance criteria and the Guidelines propose the following mix of quantitative and qualitative measures: the company s share price performance over a five-year period vis-à-vis the Singapore Straits Times Index and a benchmark index of its industry peers; return on assets, return on equity, return on investment and economic value added over a longer-term period; and qualitative measures such as setting of strategic directions and achievement of strategic objectives, quality of risk management and adequacy of internal controls. Performance criteria used should reflect the responsibility of the board to safeguard the interests of the depositors and policyholders In addition to the board as a whole, the contribution by each individual director to the effectiveness of the board should also be assessed, and such an annual report card should be used to determine the continued role or otherwise of directors on the board. Access To Information To allow directors to fulfil their responsibilities, information is critical. Accordingly, the Guidelines require management to ensure the complete, adequate and timely provision of information to directors both before board meetings on an on-going basis. Such information should include information on all potentially material risks facing the business, eg, credit, market, liquidity, legal and operational risks. Channels for obtaining information and advice should be kept open, and hence, directors should be able to obtain independent professional advice (if necessary at the company s expense) and should have separate and independent access to the company s senior management and company secretary. Page 4
The role of the company secretary is a highly crucial one, and his responsibility will include: ensuring that board procedures are followed and that applicable rules and regulations are complied with; ensuring good information flows within the board and its committees and between senior management and nonexecutive directors; and facilitating orientation and assisting with professional development as required. Remuneration The Guidelines establish that: there should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages of individual directors; the level of remuneration should be appropriate to attract, retain and motivate the 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; clear disclosure of remuneration polices should be made to investors as well as in the company s annual report; and the annual report should also provide clear disclosure the company s level and mix of remuneration, and the procedure for setting remuneration. In respect of the above, the following key aspects should be highlighted: The Remuneration Committee must comprise solely of nonexecutive directors, the majority of whom, including the chairman, should be independent; Remuneration of non-executive directors should be appropriate to the level of contribution, taking into account factors such as effort and time spent, and responsibilities of the directors. For executive directors, service contracts should have a fixed appointment period, and should not be excessively long or with onerous removal clauses. In addition, long-term incentive schemes are generally encouraged. The company should report to the shareholders each year on the remuneration of directors and at least the top five key executives (who are not also directors) of the company. Such a report may use bands of S$250,000 but companies are encouraged to specify exact figures. Accountability And Audit The board should present a balanced and understandable assessment of the company s performance, position and prospects and should ensure that management maintains a sound system of internal controls to safeguard the shareholders investments and the company s assets. It is with this function in mind that the board should establish an Audit Committee. This committee should comprise at least three directors, all non-executive. In addition, the majority of the directors, including the chairman, should be independent. The duties of the Audit Committee should include reviewing the following: the scope and results of the audit and its cost effectiveness, and the independence and objectivity of the external auditors; the significant financial reporting issues and judgments so as to ensure the integrity of the financial statements of the company and any formal announcements relating to the company s financial performance; the adequacy of the company s internal financial controls, operational and compliance controls, and risk management policies and systems established by management; and the effectiveness of the company s internal audit function. The Audit Committee will also be responsible for making recommendations to the board on the appointment, re-appointment and removal of the external auditor and approving the remuneration and terms of engagement of the external auditor. To enable the Audit Committee to carry out its function, it should have: explicit authority to investigate any matter within its terms of reference; full access to and co-operation by management; full discretion to invite any director or executive officer to attend its meetings; and reasonable resources to enable it to discharge its functions properly. Communication With Shareholders Communication with shareholders is encouraged. As communication is a two-way street, companies should: Page 5
regularly convey pertinent information and gather shareholders views or inputs; provide information that addresses shareholders concerns and which is as descriptive, detailed and forthcoming as possible; encourage greater shareholder participation at AGMs; and allow shareholders the opportunity to communicate their views on various matters affecting the company. Among the specific suggestions made, the following should be highlighted: Companies should avoid bundling resolutions and, hence, there should be separate resolutions at general meetings on each substantially separate issue. The chairpersons of the Audit, Nomination and Remuneration Committees, as well as the external auditors, should be present and available to address questions at general meetings. Miscellaneous Additional Guidelines The following additional guidelines are also provided for the board: It may establish an Executive Committee to assist in the discharge of its duties and whose composition should mirror that recommended for the board. It should ensure that there is a robust risk management system in the Institution. It should ensure that related party transactions with the Institution are undertaken on an arm s length basis. Implementation Banks and significant direct life insurers will be given until their respective annual general meetings in 2007 to comply with the Regulations. Banks and direct insurers listed on the Singapore Exchange should disclose their corporate governance practices and explain deviations from the Guidelines in their annual reports for AGMs held from 1 January 2007 onwards. Institutions that are not listed on the SGX should make disclosure on their websites. Please feel free to contact the following partner if you require any clarifications or would like any further information in this matter: Kala Anandarajah Contact Details Direct: (65) 62321111 Facsimile: (65) 65570901 E-mail: kala.anandarajah @rajahtann.com Rajah & Tann is one of the largest law firms in Singapore, with a representative office in Shanghai. It is a full service firm and given its alliances, is able to tap into resources in a number of countries. Rajah & Tann is firmly committed to the provision of high quality legal services. It places strong emphasis on promptness, accessibility and reliability in dealings with clients. At the same time, the firm strives towards a practical yet creative approach in dealing with business and commercial problems. The information contained in this Update is correct to the best of our knowledge and belief at the time of writing. The contents of the above are intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice for any particular course of action as the information above may not necessarily suit your specific business and operational requirements. It is to your advantage to seek legal advice for your specific situation. In this regard, you may call the lawyer you normally deal with in Rajah & Tann or e-mail the Knowledge & Risk Management Group at eoasis@rajahtann.com. Page 6