Recent Issues in Corporate Governance - Practice Law Seminar 2018 Jerry Koh - NUS Law
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Recent Issues in Corporate Governance Practice Law Seminar 2018 Jerry Koh 1 August 2018
KEY THEMES
Introduction
Singapore Code of Corporate Governance
Diversity
Sustainability Reporting
Dual Class Shares
Shareholder Activism
Corporate Governance & M&A
2INTRODUCTION TO CORPORATE
GOVERNANCE IN SINGAPORE
3INTRODUCTION TO CORPORATE GOVERNANCE IN
SINGAPORE
• One of the most transparent and established regimes in Asia Pacific
– Corporate Governance Watch 2016: 1st of 11 countries in the region
• Other countries involved in the ranking:
2. Hong Kong 7. India
3. Japan 8. Korea
4. Taiwan 9. China
5. Thailand 10. Philippines
6. Malaysia 11. Indonesia
– Transparency International’s Corruption Perceptions Index 2017: 6th of 180
countries
• Singapore ranked after:
1. New Zealand
2. Denmark
3. Finland; Norway; and Switzerland (tied)
– World Bank’s Ease of Doing Business Ranking 2018: 2nd of 190 countries
• Singapore ranked after:
1. New Zealand
4INTRODUCTION TO CORPORATE GOVERNANCE IN
SINGAPORE
• Our corporate governance regime comprises a mix of the following rules
and guidelines:
“Comply
Mandatory
or explain”
rules
provisions
Best practice
recommendations
5SINGAPORE CODE OF
CORPORATE GOVERNANCE
6SINGAPORE CODE OF CORPORATE GOVERNANCE
• Aims
– To support corporate performance and innovation
– To strengthen investor confidence in Singapore capital markets
• Timeline:
2018
Consultation
2012
on reviewing
Issuance of a
2006 the Code
second
Issuance of • Anticipating
2003 revised Code
a third
revised Code
The Code revised
2001 Code soon
came into
Introduction of
effect on 1
the Code by
Jan 2003
the Corporate
Governance
Committee
7CG COUNCIL’S PUBLIC CONSULTATION ON THE CG CODE
In Jan 2018, the Corporate Governance Council (the “CG Council”)
launched a public consultation on changes to the Code of Corporate
Governance (the “CG Code”)
• Rationale: To make the “comply or explain” regime under the Code more
effective
• Enhancing corporate governance standards via “three levers”:
1. Focusing on Singapore’s context
2. Strengthening board quality
3. Fostering a supportive eco-system
8CG COUNCIL’S PUBLIC CONSULTATION ON THE CG CODE
Comply-or-explain regime will be further clarified / revised
• The proposed revised CG Code is structured into 13 overarching Principles,
each comprising detailed Provisions
Proposed Framework
Current CG Code
(Multi-tier structure)
Principles:
Principles and Guidelines:
Mandatory compliance
Comply or explain any deviation
Provisions: Comply, or if there is
variation, explain (i) reason for variation;
and (ii) how the practice is consistent with
intent of the relevant Principle
Practice Guidance: Non-binding
guidance and best practices
9CG COUNCIL’S PUBLIC CONSULTATION ON THE CG CODE
Comply-or-explain regime will be further clarified / revised
• 13 Principles – Overarching and non-disputable statements:
1. Effective 3. Clear 4. Formal
2. Appropriate division of and 5. Formal
Board
balance of responsibility transparent annual
responsible
independence process for assessment of
for company’s between
and diversity directors’ performance
long-term Board and
on the Board appointment
success Management
6. Formal, 9. Governance
7. 8.
transparent of risk to
Remuneration Transparent
procedure safeguard
proportionate on
for interests of
to company remuneration
remuneration company and
policies
policy performance shareholders
13. Inclusive
12.
10. AC which 11. Treats approach by
Shareholder
discharges its shareholders considering
communication
duties fairly and needs of
and
objectively equitably material
participation
stakeholders
10CG COUNCIL’S PUBLIC CONSULTATION ON THE CG CODE
Baseline market practices to be shifted to the SGX Listing Manual
• There are Guidelines in the current CG Code which are in effect important
baseline market practices – CG Council has recommended shifting them to
the SGX Listing Manual for mandatory compliance
• Baseline market practices to be mandatorily complied with:
1) Induction for incoming directors
2) Independent directors
3) Identification of independent directors in the annual report
4) Baseline tests of director independence
5) Relationship between Chairman and CEO
6) 9-year rule
7) Board committees
8) Directors’ re-nomination and re-appointment
9) Key information on directors
10) Adequacy and effectiveness of internal controls
11) Internal audit
12) Disclosure of reasons for non-payment of dividends
11DIVERSITY
12DIVERSITY
• The call for diversity
– Increasingly recognised as a feature of corporate governance across countries
• Diversity enhances ability to identify opportunities and manage risk
– Gender Diversity: Female independent directors have a positive direct effect
on companies’ financial performance (NUS’ Centre for Governance, Institutions
and Organisations, 2018)
• Adding one female independent director, on average, is expected to improve financial
performance by 11.8%
– Age Diversity: People from different age groups bring different life experiences
and perspectives to the table
13GENDER DIVERSITY
• Diversity Action Committee (“DAC”)
– Established in 2014 by Mr Chan Chun Sing, then Minister for Social and Family
Development
– Aim: To address the under-representation of women on SGX-listed boards
– “Hop, skip and jump” approach to raise women’s participation: Triple-tier target
of 20% by 2020, 25% by 2025 and 30% by 2030
• Cf Current women representation on boards:
Source: DAC, 2018; Straits Times graphics
14GENDER DIVERSITY
• Current women representation on boards
– Fewer all-male boards among Singapore-listed companies:
Source: DAC, 2018; Straits Times graphics
15GENDER DIVERSITY
California experience: Proposed board quotas
• In May 2018, the California State Senate passed a bill for board quotas
– If enacted, a public company with shares listed on a major US stock exchange
that has principal executive offices in California would need to have:
• at least one woman on its board by end-2019;
• if company has five directors, at least two female directors by end-2021;
• if company has at least six directors, at least three female directors by end-2021.
– Rationale
• Studies indicate that companies perform better with women on their boards
• More female directors would be beneficial to California’s economy, yet progress towards
gender parity is too slow
• As of June 2017, 26% of California public companies in Russell 3000 had no female
directors, while women made up 15.5% of directors on boards with at least one woman
– Controversy
• California Chamber of Commerce filed an opposition letter arguing that the bill would
violate constitutional law and California civil rights law, on the basis that it may require
male directors to be displaced by female directors
16GENDER DIVERSITY
Singapore experience: No plans for board quotas
• In 2014, the Diversity Task Force regarding Women on Boards did not
recommend board quotas
– Noted that the causes of poor gender diversity are complex and intertwined, e.g.:
• Lack of awareness of importance of gender diversity
• Over-reliance on personal networks to source for directors
• Women who are capable of serving on boards may not wish to do so
– Instead, recommended multi-stakeholder approach to address root causes of
poor gender diversity
• Proposed allowing these measures to run their course before assessing if quotas are
needed
• DAC’s view on board quotas
– Meeting numbers does not guarantee that benefits follow
– DAC is interested in women on boards for the benefits that they would bring
• But DAC and regulators have not closed the door on the possibility of board
quotas
17AGE DIVERSITY
• Age diversity
– Benefits of having Board and Board committees with directors of different ages
• Helps companies to keep pace with fast changing trends and developments in the
preferences and behaviour of different generations of consumers; and
• Helps companies develop capabilities for the future economy
– Proposed CG Code expressly contemplates age diversity:
“The Board and board committees are of an appropriate size, and comprise
directors who as a group provide the appropriate balance and mix of
skills, knowledge, experience, and other aspects of diversity such as gender
and age, so as to avoid groupthink and foster constructive debate.”
18SUSTAINABILITY REPORTING
19SUSTAINABILITY REPORTING
What is sustainability reporting?
• Sustainability reporting: Publication of non-financial information such as
environmental, social and governance (“ESG”) information in a
comprehensive and strategic manner
• Drivers:
– Environmental concerns
– Demand by investors and other stakeholders for more information and
transparency
20SUSTAINABILITY REPORTING
SGX’s introduction of mandatory requirements in mid-2016
• Sustainability reporting required for financial years ending on or after 31
December 2017
– Issuers to disclose any deviation and describe its actual practice, with reasons for
such deviation
– Rule 711B of the SGX Listing Manual requires description of sustainability
practices based on five primary components
• Prior to the SGX’s requirements for mandatory sustainability reporting:
– Out of 502 Mainboard-listed companies on the SGX-ST in 2015, 186 companies
voluntarily communicated sustainability, constituting 37.1% of the companies
(ASEAN CSR Network & Centre for Governance, Institution and Organisations
Report, Oct 2016)
21SUSTAINABILITY REPORTING
SGX’s introduction of mandatory requirements in mid-2016
• Five primary components under the SGX Listing Manual:
Primary Component Disclosures
a) Material ESG factors • Reasons for each material ESG factor and selection process
b) Policies, practices and • Issuer's policies, practices and performance in relation to the
performance material ESG factors (both descriptive and quantitative)
c) Targets • Targets for the forthcoming year
d) Sustainability reporting • Sustainability reporting framework(s) to be selected
framework – Should be suited to issuer’s industry and business model
• Disclose reasons for choosing the framework(s) and the extent
of the issuer's application of the framework(s)
e) Board statement • Board statement, stating that the sustainability report complies
with primary components, or has otherwise explained
alternative practices
22SUSTAINABILITY REPORTING
Board statement and its implications
• Board responsibility
– SGX Listing Manual imposes on the Board “ultimate responsibility for the issuer’s
sustainability reporting”
• Requirement to disclose Board statement under the SGX Listing Manual:
“The sustainability report should contain a statement of the Board on the Board having
considered sustainability issues as part of its strategic formulation, determined the
material ESG factors and overseen the management and monitoring of the
material ESG factors.” (Rule 711B(1)(e) of the SGX Listing Manual)
• Potential liability implications
– Possible for the Board’s statement to result in liability risks under Singapore law
• Especially under Section 199 of the Securities and Futures Act, which prohibits the
making of a statement that is false or misleading in a material particular
– Could potentially enable investors to hold the Board accountable for its failure to
adequately manage sustainability risks
23SUSTAINABILITY REPORTING
Some observations on the practice of SGX-listed issuers
• SGX-listed issuers are still adapting to the new sustainability reporting
requirements
– Cost concerns, especially for smaller companies
– But conscious investment in sustainability efforts could provide long-run benefits
• Operational efficiencies
• Enhanced reputation
– Ultimately, the impact of sustainability reporting here remains to be seen as it is
relatively new
• Common topics / issues
– Corporate governance
– Environment (e.g. energy and water consumption, carbon footprint)
– Social / employment practices
24SUSTAINABILITY REPORTING
Key considerations for Boards on sustainability reporting
• ESG factors should be considered as part of Board’s annual strategy
review
– Identify emerging ESG factors or trends
– Consider how best to allocate resources in managing the most critical ESG risks
• Importance of calibrating the level of constructive disclosure
– Balancing between transparency vs. avoiding immaterial or duplicative
disclosures
25DUAL CLASS SHARES
26SGX’S INTRODUCTION OF DUAL CLASS SHARES
SGX’s introduction of dual class shares
• On 26 Jun 2018, SGX introduced rules on the listing of issuers with dual
class share (“DCS”) structures
– Allows certain shareholders voting rights disproportionate to their shareholding
– The new rules take immediate effect
• Rationale
– Maintain Singapore’s competitiveness and attractiveness as a financial hub
– Draw high-technology companies and family businesses
– In line with Singapore’s strategy to strengthen its innovation ecosystem and
enterprise capabilities
27STRATEGIES TO ATTRACT MORE IPOS
SGX’s recent introduction of dual class shares
• Must show suitability for DCS listing
• Non-exhaustive factors:
Business model Track record
Role and contribution of
Participation by
multiple-vote
sophisticated investors
shareholders
Other features that require DCS structure
(e.g. innovative company, family business)
28SAFEGUARDS TO ADDRESS RISKS
Addressing Addressing
Entrenchment Risks Expropriation Risks
Maximum voting differential of Enhanced voting process – For
10:1 for multi-vote shares constitutional amendments,
variation of class rights,
winding-up, etc.
Minimum 10% voting rights to be
held by one-vote shareholders
Independent directors –
Sunset clause with events Majority of AC, NC, RC
stipulated at IPO
29COMPARISON WITH HKEX
SGX & HKEx DCS regimes
• On the heels of Hong Kong’s launch of its DCS regime, which has attracted
multi-billion dollar IPOs
– E.g. Xiaomi’s DCS IPO in June 2018; Meituan Dianping has filed for DCS IPO
• SGX vs. HKEx
SGX Rules HKEx Rules
• Applicant must be suitable for listing with • Applicant expected to demonstrate:
DCS structure – Necessary characteristics of
• Note: SGX rules are silent as to nature of innovation and growth
the applicant – more flexibility in – Suitable for listing with a weighted
determining suitability of applicant voting rights structure
Food for thought: Does SGX’s DCS regime strike an appropriate balance between
promoting IPOs and mitigating expropriation and entrenchment risks?
30US EXPERIENCE WITH DCS LISTINGS
US experience with DCS
• Nasdaq and NYSE have actively solicited and listed issuers with DCS
– In the US, almost 30% of IPO companies have ≥2 classes of common stock
and unequal voting rights (Davis Polk Survey, 11 July 2018)
• In March 2017, Snap’s IPO was the first in which only non-voting shares
were offered to the public
– Controversy when global index providers announced that they will partially or
fully exclude companies with DCS from their indices
• E.g. Certain S&P Down Jones Indices, FTSE Russell indices
• Role of index providers in shaping governance standards
– Cf Would index exclusion for DCS companies deprive retail investors of
investment exposure to some of the most innovative US companies?
31SHAREHOLDER ACTIVISM
32SHAREHOLDER ACTIVISM
• Increasing shareholder activism in Singapore and other jurisdictions in
recent years
• Controversial process by which shareholders exert their influence by
generating pressure on management
• Spearheaded primarily by two kinds of investors in the past 10 years:
Investors whose motives
Investors whose motives
are to improve corporate
are purely profit driven
social responsibility
33SHAREHOLDER ACTIVISM
Role of proxy advisory firms in corporate governance
• A proxy advisory firm provides advice to institutional and other investors
on how to vote their shares / units at general meetings
– E.g. Institutional Shareholder Services, Inc., which has in the past recommended
institutional investors of SGX-listed issuers against voting in favour of certain
types of resolutions
• E.g. Resolution for share/unit buyback mandate of an issuer
• Institutional investor may, as a matter of internal policy, follow the
recommendation of the proxy advisory firm
34SHAREHOLDER ACTIVISM
Sabana REIT case study (2017)
• Unitholders were unhappy with non-yield accretive acquisitions and
significant discount to rights issue price
• 66 unitholders of Sabana REIT (holding 0.6% of total units in issue)
requisitioned an EGM to, among others, replace the REIT Manager with an
internalised manager
• Activist pressure led the REIT Manager to carry out a strategic review to
improve the REIT’s performance
• Impact of social media and online platforms
– E.g. Facebook, ShareJunction, Hardwarezone Forum
35SHIFT TOWARDS STAKEHOLDER MODEL
• Overall trend towards the stakeholder-centric model of corporate
governance in Singapore and other countries
• BlackRock’s Annual Letter to CEOs (2018):
“The time has come for a new model of shareholder engagement – one that
strengthens and deepens communication between shareholders and the companies
that they own.”
“Society is demanding that companies, both public and private, serve a social
purpose. To prosper over time, every company must not only deliver financial
performance, but also show how it makes a positive contribution to society.”
– Mr Larry Fink (BlackRock’s Founder, Chairman and CEO)
• Importance of investor relations
– To properly articulate long-term business strategies to shareholders/unitholders,
customers, suppliers, regulators and other stakeholders
36SHIFT TOWARDS STAKEHOLDER MODEL
UK & Singapore: Shareholder primacy vs. Stakeholder interests
• The UK framework is traditionally based on shareholder primacy
• Signs of a shift towards stakeholder model
– Section 172 of the UK Companies Act 2006 requires directors to consider the interests
of certain stakeholders:
“A director … must act in the way he considers, in good faith, would be most likely to
promote the success of the company for the benefit of its members as a whole, and in
doing so have regard (amongst other matters) to …
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers,
customers and others,
(d) the impact of a company’s operations on the community and the environment, …
(f) the need to act fairly as between members of the company.”
37SHIFT TOWARDS STAKEHOLDER MODEL
UK & Singapore: Shareholder primacy vs. Stakeholder interests
• Cf Director’s duty to act in the best interests of the company under Singapore
law
• Section 159 of the Singapore Companies Act does contemplate that directors
can consider the interests of its employees and members
– Unlike Section 172 of the UK Companies Act 2006, Section 159 of the Singapore
Companies Act is permissive, rather than prescriptive
“159. The matters to which the directors of a company are entitled to have regard in exercising
their powers shall include —(a) the interests of the company’s employees generally, as well
as the interests of its members…”
38SHIFT TOWARDS STAKEHOLDER MODEL
UK experience: 2018 Corporate Governance Code
• On 16 July 2018, the revised UK Code was issued
• The slight shift towards the stakeholder model has been highlighted in the
2018 UK Code
“‘The shareholders’ role in governance is to appoint the directors and the auditors and
to satisfy themselves that an appropriate governance structure is in place.’ This remains
true today, but the environment in which companies, their shareholders and wider
stakeholders operate continues to develop rapidly… To succeed in the long-term,
directors and the companies they lead need to build and maintain successful
relationships with a wide range of stakeholders.”
• Concept of “purpose” forms the guiding principle of the 2018 UK Code
“The board should establish the company’s purpose, values and strategy, and satisfy
itself that these and its culture are aligned. All directors must act with integrity, lead by
example and promote the desired culture.”
39SHIFT TOWARDS STAKEHOLDER MODEL
UK experience: 2018 Corporate Governance Code
• Emphasis on employees as stakeholders
• 2018 UK Code requires the Board to promote greater engagement with the
workforce using one, or a combination of the following:
Alternative
engagement
Director
Formal Designated mechanisms
appointed
workforce non-executive which the
from the
advisory panel director Board
workforce
considers
effective
40CORPORATE GOVERNANCE &
M&A
41CORPORATE GOVERNANCE & M&A
M&A as a mechanism for promoting corporate governance
• Hostile takeover as a mechanism for aligning managers’ interests with
shareholders’ interests
• The risk of a hostile takeover poses an external threat which could
incentivise good governance
– Mitigates agency costs which arise from the separation between ownership and
control in a company
Poor corporate governance
Reduces the share price of the company
Could result in the company becoming a ripe takeover target
42SHAREHOLDER PRIMACY VS. MANAGERIAL AUTONOMY
Degree of shareholder primacy in takeover regulation
• Management has more
Managerial autonomy to consider
Autonomy interests of other
stakeholders and pursue
long-term value
• Favours strong
defences against
• Takeover regime should takeovers
maximise shareholders’ Shareholder • E.g. US
interests and minimise Primacy
agency costs
• Favours weak defences
against takeovers
• E.g. UK
Food for thought: To what extent should shareholder primacy prevail under the
Singapore takeover regime?
43SHAREHOLDER PRIMACY VS. MANAGERIAL AUTONOMY
Defensive measures against takeovers
• Examples of defensive measures:
– Poison pill (shareholder rights plans)
– Crown jewel defence (substantial disposals)
– Golden handshakes (payments to key personnel for loss of office)
– Payment of special dividends
• Non-frustration rule has developed in some takeover regimes to limit the extent to
which management can hinder a takeover
– E.g. General Principle 7 of the Singapore Code on Take-overs and Mergers (“Takeover
Code”) – Draws a distinction between pre-bid vs. post-bid steps
“7 Frustration of an offer by offeree board
If the board of an offeree company has received a bona fide offer or has reason to
believe that a bona fide offer is imminent, it must not, without the approval of
its shareholders in general meeting, take any action on the affairs of the offeree
company that could effectively result in any bona fide offer being frustrated or the
shareholders being denied an opportunity to decide on its merits.”
44SHAREHOLDER PRIMACY VS. MANAGERIAL AUTONOMY
Defensive measures against takeovers
• Examples of defensive measures prohibited under Rule 5 of the Takeover Code:
“Such actions include but are not limited to:-
(a) issue any authorised but unissued shares;
(b) issue or grant options in respect of any unissued shares;
(c) create or issue or permit the creation or issue of any securities carrying rights of
conversion into or subscription for shares of the company;
(d) sell, dispose of or acquire or agree to sell, dispose of or acquire assets of material
amount;
(e) enter into contracts, including service contracts, otherwise than in the ordinary course
of business…”
• Cf Counter-argument in favour of managerial autonomy – that Boards and
management should be given sufficient space in which to formulate and implement a
long-term strategy
45SHAREHOLDER PRIMACY VS. MANAGERIAL AUTONOMY
Poison pill defence
• Operates by substantially increasing the cost of acquisition
• Board of directors adopts a shareholder rights plan, which is triggered
once the bidder acquires the target shares beyond a specified percentage
threshold
• Rights or warrants are then distributed to shareholders other than the
bidder, allowing them to purchase shares in the target at a discount – results
in massive dilution of the bidder’s shareholding in the target
46SHAREHOLDER PRIMACY VS. MANAGERIAL AUTONOMY
Poison pill defence
• United States
– Shareholder rights plans recognised as a valid instrument of takeover defence in
Moran v Household International, Inc. (Delaware Supreme Court, 1985)
• Cf Shareholder rights plans are difficult to implement in Singapore
– Section 161 of the Companies Act requires directors to obtain shareholders’
approval in relation to any issuance of shares
– At common law, directors must also ensure they are acting in the interests of the
company in issuing the shares
• Some have argued that poison pills may be detrimental to shareholders’
interests as they entrench incumbent management
47Q&A
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