Corporate governance in a post-pandemic world
By PROFESSOR HO YEW KEE
The Business Times, 8 March 2024
AS BUSINESSES adjust to a post-Covid world, what are some lessons from the pandemic that can help companies build resilience and future-proof their organisations?
The Singapore Directorship Report 2023, published by the Singapore Institute of Directors (SID), offers useful benchmarks for businesses to better position themselves as trusted, reliable and accountable.
Opportunities for change are in the areas of board independence, sustainability and remuneration disclosures.
Pool of independent directors to be enhanced
First, more independent directors (IDs) are needed.
The Code of Corporate Governance states that the board should have an appropriate level of independence and diversity of thought and background in its composition to enable it to make decisions in the best interests of the company.
The good news is that Singapore-listed firms continue to see an increasing trend in the proportion of IDs on boards. The majority of board seats (54.5 per cent) are held by IDs in 2023, compared to less than half in 2014.
However, 20.9 per cent of those IDs have served more than nine years. By the time annual general meetings are held in 2024, long-serving IDs will no longer be classified as “independent”.
As many as 462 long-serving IDs might have to be replaced or redesignated as non-independent non-executive directors in 2024 – with the hard-coding of the nine-year rule in 2023 which limits the tenure of IDs to nine years.
Boards need to plan for renewal. A deliberate succession plan for the board and chair are critical, as businesses navigate an increasingly complex landscape.
SID’s Board Readiness Programme seeks to prepare aspiring directors for board roles and expand the pool of directors. Accreditation will also introduce a more rigorous and consistent director competency standard for board members.
Long-serving IDs could pose a potential challenge to board independence. While they are steeped in institutional knowledge of their firms, that familiarity can turn into a blind spot.
Accordingly, board diversity can bring new insights, skillsets and a “fresh pair of eyes”. Boards need to balance retaining experienced IDs and ensuring a refreshed slate of IDs to foster innovation and relevance.
The ID renewal process can be challenging and disruptive. However, this provides firms with a golden opportunity to onboard directors with specific and varied skill sets, ensuring a board that is updated with the current business needs of the firm.
Sustainability is more than disclosure
Second, sustainability, or a focus on environmental, social and governance (ESG) factors, is now firmly on the board agenda.
This is partly due to regulatory pressures and investor expectations. Sustainability should, however, go beyond mere disclosure. It represents a transformative approach to conducting business, and many firms are actively embracing this shift.
In 2023, 53 listed companies had board-level sustainability committees (with an additional eight integrating sustainability into their risk and/or audit committees) – up from just eight in 2021. But this is still a fraction of the total 650 listed companies.
While board-level sustainability committees are not mandatory if the board retains overall oversight over sustainability issues, it is an indicator of greater board focus if a specific board committee is established for this purpose.
With effect from 2022, the Singapore Exchange (SGX) requires climate reporting on a “comply or explain” basis, and this is set to be made mandatory for carbon-intensive industries in the subsequent years.
Increasingly, firms recognise the impending need for audited sustainability reports, whether in a limited or reasonable assurance report. A limited assurance report is arguably of lower value as the conclusion is framed in the negative (“Nothing came to our attention”).
A more onerous but better form is a reasonable assurance report where the auditor has to provide a high level of assurance that positively concludes that there is reasonable, but not absolute, assurance that the sustainability report is not materially misstated. More, however, needs to be done to transform the way that businesses operate for long-term sustainability.
Remuneration disclosure to improve
Third, remuneration disclosures, which have long fallen short, need to change. Just over a third (37.5 per cent) of listed companies complied with detailed remuneration reporting of CEOs and directors in 2023. With new SGX listing rules coming into effect by 2025, the disclosure of CEO and director remuneration will be mandatory.
Remuneration disclosures are intended to encourage transparency, openness and accountability.
In salary-sensitive Singapore, the resistance from firms towards detailed remuneration disclosure primarily stems from fears of talent poaching and the resultant upward pressure on remuneration. With the new reporting requirements, the landscape will level out, with all SGX-listed firms publicly revealing these remuneration figures.
While firms will have to comply with the new requirements, they can also take the opportunity to explain their performance-linked remuneration matrix.
This is an opportunity for firms to review and evaluate their performance-remuneration strategies and identify robust signalling mechanisms to gain investors’ trust and engage stakeholders.
As corporate governance trends evolve, it is necessary for both firms and regulatory bodies to continually reassess the existing corporate governance framework to ensure it remains relevant and effective.
The insights from the 2023 Report shed light on the prevailing practices, paving the way for a resilient future in corporate governance.
The writer is a member of the Singapore Directorship Report 2023 working committee at SID.