Heng Swee Keat: Corporate governance developments in Singapore
Keynote address by Mr Heng Swee Keat, Managing Director of the Monetary Authority of
Singapore, at the 2009 Asian Investors' Corporate Governance Conference, Singapore,
19 November 2009.
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Mr. Tan Chok Kian, Chairman, Securities Investors Association (Singapore)
Mr. David Gerald, President & CEO, Securities Investors Association (Singapore)
Distinguished guests
Ladies and gentlemen
Introduction
Good morning. I am very happy to join you today at this inaugural Asian Investors' Corporate
Governance Conference. Thank you for inviting me to speak at this event.
I congratulate SIAS and your partners on bringing together such a wide range of investors
and corporate governance practitioners from across Asia. I applaud your commitment to hold
this event annually, as it is necessary for practitioners to stay abreast of the latest corporate
governance developments and to reflect on how we can do better.
Corporate governance as an on-going concern
Good corporate governance is a key pillar underpinning Singapore's reputation as a trusted
financial and business hub. Over the years, we have sought to continually improve corporate
governance in Singapore. This includes a review of the Code of Corporate Governance in
2005 by the former Council for Corporate Disclosure and Governance ["CCDG"], chaired by
Mr. JY Pillay.
In the last two years, following the transfer of oversight of corporate governance of listed
companies to MAS and the Singapore Exchange, we have focused on strengthening the
practices of corporate governance in Singapore. In 2007, Professor Mak Yuen Teen of the
National University of Singapore was commissioned by MAS to undertake a study aimed at
assessing the current state of corporate governance practices in Singapore, identifying gaps
and proposing measures for improvement.
Professor Mak highlighted, among others, the need to enhance the effectiveness of Audit
Committees through training, practical guidance and sharing of experience among Audit
Committee members.
Arising from this, the MAS, the Accounting and Corporate Regulatory Authority ["ACRA"] and
the Singapore Exchange established a private sector committee to develop practical
guidance to assist Audit Committees to better appreciate their responsibilities and enhance
their effectiveness in performing their role. The Committee, led by Mr. Bobby Chin, worked
intensely over 9 months and completed its work in October 2008. The Committee's output,
"Guidebook for Audit Committees in Singapore", has become a practical and valuable
reference for directors who serve on the Audit Committees.
We have also been supportive of efforts by the Singapore Institute of Directors to review its
structure and strengthen the delivery of its director training program, so that it may better
meet the increased demands placed on directors in this current environment.
The continual efforts by industry practitioners, investors and regulators to improve corporate
governance have enabled Singapore to stay ahead of the field. The World Economic Forum's
Global Competitiveness Report 2009, for instance, ranked Singapore first in corporate
governance standards in Asia.
Lessons from the crisis
In the aftermath of crises, corporate governance standards and practices often come under
scrutiny. For instance, after the Enron/Worldcom failures, critics pointed to the lack of
independence of auditors and Audit Committees, and to deficiencies in accounting
standards. After the bursting of the dot.com bubble, attention was drawn to the severe
conflicts of interest by brokers and analysts.
The recent financial crisis has been no different. Indeed, reviews by international bodies and
national agencies have found that weak corporate governance played a role in this crisis. For
instance, the OECD report on "The Corporate Governance Lessons from the Financial
Crisis"1 noted that "the financial crisis can be, to an important extent, attributed to failures
and weaknesses in corporate governance arrangements which did not serve their purpose to
safeguard against excessive risk taking in a number of financial services companies."
While many of the corporate governance failures that have been uncovered so far affected
financial companies, many of the structural weaknesses may also be common to large and
complex listed firms. It is therefore relevant for Boards of other companies to reflect on these
findings. Let me briefly highlight a few common themes.
The first relates to the quality and composition of Boards. Research shows that although
having a good balance of directors with a range of skills and experience that are relevant to
the business of the firm is an essential foundation for good corporate governance, this was
also often the most neglected.
A number of reports2 also found weaknesses in the implementation of effective risk
management. In many cases, risk was not managed on an enterprise-wide basis and Boards
were not fully apprised of the level of risk facing the company. Overseas regulators are now
reviewing the role of Boards in providing guidance on the alignment of corporate strategy
with risk-appetite, as well as on appropriate internal structures in risk management.
Not surprisingly, remuneration practices have attracted the most public attention. The
alignment of executive and Board remuneration with the longer term interests of the
company and its shareholders is a widely accepted corporate governance principle.
Nonetheless, compensation practices that rewarded staff handsomely for short-term gains,
without any corresponding penalties for longer-term losses, have been blamed for
encouraging excessive risk taking in some institutions. A number of jurisdictions, such as
Australia and the US, are considering legislation that will address this by empowering
shareholders to have a more direct role in setting remuneration.
Creation of the Corporate Governance Council
Financial institutions in Singapore have generally been prudent in their business, and have
weathered the crisis well. Listed companies in Singapore that have maintained high
standards of governance have similarly withstood the crisis. Nevertheless, we must not be
complacent. We must not let up in our efforts to improve our regulations and codes, as well
as in the actual practices and governance culture.
As part of this effort, I am pleased to announce that we will be establishing a Corporate
Governance Council, comprising members from the private and public sectors.
The objective of the Council will be to promote a high standard of corporate governance in
companies listed in Singapore so as to maintain and enhance investors' confidence. In turn,
this will enhance Singapore's reputation as a leading and trusted financial centre, and benefit
all players involved.
In conceptualising the Corporate Governance Council, the CCDG serves as a useful
reference. Unlike the CCDG, which also had responsibility for promulgating accounting
standards and improving disclosure practices, the Corporate Governance Council's focus will
be squarely on corporate governance matters.
Among the Council's roles will be the identification of opportunities for continuing professional
development of directors and the development of practical guidance for Board committees.
By taking into account perspectives of relevant stakeholders, the Council can develop
initiatives that are robust and balanced, and achieve broad support and alignment of all
parties.
MAS will announce members of the Corporate Governance Council, and its terms of
reference, early next year.
Review of the Code of Corporate Governance ("the Code")
An important and immediate task for the Council once it is set up will be to conduct a review
of Singapore's Code of Corporate Governance.
The Code was last reviewed in 2005 and took effect for all AGMs held on or after 1 January
2007. The Code has served us well. However, this financial crisis has thrown up valuable
lessons on corporate governance. Members of our media, academia and the corporate and
financial sector have also been suggesting possible improvements, and several overseas
jurisdictions have also completed or are in the process of updating their own Codes. It is
therefore timely for us to embark on another review. In determining the scope of the review,
the Council could consider the suggestions for improvements from stakeholders, and
developments in other jurisdictions, taking into account the local context where relevant.
Higher standards for banks & insurance companies
This financial crisis has shown that the failures of financial institutions with significant
operations can destabilise the entire financial system, and severely disrupt economic
activities. MAS' approach has been to require high regulatory and prudential standards for
locally incorporated banks and life insurance companies as well as standards of corporate
governance that are more stringent than what they have to observe as listed companies.
Locally incorporated banks and significant life insurers are required to comply with the
Corporate Governance Regulations which are mandatory as opposed to the Code which is
applied on a "comply or explain" basis. The Corporate Governance Regulations also impose
more stringent requirements regarding the composition of Boards and Board committees.
MAS is in the midst of reviewing the Corporate Governance Framework for locally
incorporated banks and insurers. The review will focus on the effectiveness of risk
management at the Board level, including the role played by Boards in safeguarding the
safety and soundness of their institutions and in addressing market conduct risks. This would
include a review of the Board's role in setting remuneration policies to manage risks
effectively and the need for the Board to comprise members with relevant expertise and
experience in the technical, financial and operational aspects of risk management of the
various lines of business of the financial institution.
MAS will also review the need to further tighten the definition of independence by requiring
the Nominating Committee to consider the length of service on the Board as an additional
criterion in determining the independence of a director.
With regards to remuneration practices, MAS has done an initial assessment of the practices
of our local banks against the Principles for Sound Compensation Practices issued by the
Financial Stability Board. We support the idea of aligning compensation with appropriate
risktaking. As the core issue is the holistic management of risks across the institution, MAS will,
in our implementation of these Principles, incorporate these into the Corporate Governance
Framework. That way, the various governance elements pertaining to risk management can
function in a balanced and coherent manner.
Role of advocacy bodies
So far I have spoken mainly on the role of regulators in setting out good corporate
governance Codes and practices. However, the quality of corporate governance depends
critically on people and values.
Industry groups such as SIAS have an important role in formulating and implementing higher
standards of corporate governance practices. I would like to take this opportunity to applaud
SIAS for being a tireless advocate of investor rights. Mr. David Gerald, in particular, has
contributed significantly in this area. SIAS has played its part in empowering securities
investors through education and information, most recently with regard to structured
products. It has also played a role as a "corporate integrity watchdog" by actively engaging
corporations that have fallen short of good corporate governance practices.
The effort to promote good corporate governance practices and to cultivate ethical corporate
culture and behaviour is also supported by advocates in the media, academia and
professional associations.
Our local media have highlighted good and bad practices. Several journalists have written
thoughtful pieces. It is useful to have discerning commentary that points to deficiencies in
specific firms without over-generalising.
The National University of Singapore Corporate Governance and Financial Reporting Centre,
as well as the Singapore Management University Sim Kee Boon Institute for Financial
Economics both publish useful indices that assess the standards of corporate governance in
Singapore.
Professional associations such as ICPAS, IIA, SAICSA and SID have also been playing their
roles in this area.
Conclusion
In closing, let me reiterate the point that good corporate governance pays - if not in
immediate share prices, at least in the resilience of the firm in a crisis. Indeed, one key
conclusion from the study by the Senior Supervisors Group3[3] is that financial firms that best
rode out the recent crisis were ones with good corporate governance standards,
demonstrating "a comprehensive approach to viewing firm-wide exposures and risk, sharing
quantitative and qualitative information more effectively across the firm and engaging in more
effective dialogue across the management team."
Better governance per se does not guarantee that there will never be a crisis, but it can
minimise its probability and its impact if it does occur. Singapore has made good progress
over the years in our corporate governance practices, but we must press on with continual
improvements. As regulators, professional bodies, investors, academics and the media, we
each have a role - let us work closely together in this journey.
Finally, while my comments have focused mainly on Singapore, it is heartening that we have
such a deep and diverse group of investors and practitioners from around the region. I am
sure there will be much that we can learn from each other, and I hope that deep and frequent
interactions like this catalyse new ideas and spur us all to do better. I wish you a fruitful
conference. Thank you.