New Corporate Governance PROPOSED (Part B)

Dear friends,

My focus for this posting is the composition of the Board and other specified criteria for directors.

Proposal – Board Composition
Half the board to be made up of independent directors under the following circumstances where:-
a) the chairman and CEO is the same person;
b) the chairman and CEO are immediate family members;
c) the chairman and CEO are both part of the management team;
d) the chairman is not an independent director.

Mak Yuen Teen said the whole long-winded recommendation “can be simplified to just recommending that there should be at least half the directors independent if the chairman is not an independent director” (full stop).

Based on data from the 2010 Governance and Transparency Index, it is estimated that only 14 per cent of SGX-listed companies have an independent chairman and with more than 50 per cent of all SGX-listed companies currently have less than half the board independent. The Council views that a director be deemed non-independent if he has served on the board for more than nine years. The average tenure for all independent directors is 6 years.

Given the statistics presented in paragraph above, I wish to raise again the issue of whether the Council’s proposals can be effectively carried out given our limited pool of qualified and experienced directors.

Proposal – Director with multiple directorships
The Council has decided (ie. chicken out, don’t know or just being flexible?) not to spell out an ‘ideal’ number of directorships any one director should have. (Hong Kong has suggested a limit.) But Council has chosen to delegate that responsibility to the nominating committee “to decide if a director can carry out his duties, bearing in mind his commitments”.

In my opinion, Mak Yuen Teen opines that this proposal would be inconsequential as board with directors. with many directorships. would have its nominating committee setting higher limit, vice versa. Anyway by the time we do the next review, the next Council would be able to harvest the experience of last few years in determining the ideal limit.

Proposal – Appointment of alternate director
The Council suggests that directors should avoid appointing alternate directors – except for limited periods in exceptional cases. Why? Alternate directors may not be as well-prepared nor able to perform as well as full-time directors.

This suggestion could be attributed to Mak Yuen Teen’s vigorous exchanges with Christopher Chong in Sep 2010 on Xpress Holdings’ the nominating committee endorsing the appointment of an alternate director for one of its independent directors.

Michelle Quah, “Cracking the code of Corporate Governance”, Business Times, June 15, 2011.
Michelle Quah, “Will bold proposals survive the fate of 2005?”, Business Times, June 16, 2011.
Mak Yuen Teen, “Now let’s see the practical impact”, Business Times, June 16, 2011.
Mak Yuen Teen, “Unticking the box”, Business Times, September 6, 2010.

New Corporate Governance Guidelines PROPOSED (Part A)

Dear friends,

My intention here is to bring together key ideas and comments I can gather so far on each of the proposal.

Singapore’s Corporate Governance Council (CGC) was appointed by the Monetary Authority of Singapore (MAS) in February 2010 to review the 2005’s version of corporate governance guidelines accepted by Ministry of Finance (MOF). On June 14, 2011, CGC has proposed bold changes to existing corporate best practice guides for MAS acceptance by end 2011.

Proposal – Independence of independent directors
Stricter definition of independence for independent directors (to now include independence from substantial shareholders)

The Council seeks to define “independence” by defining when a director is not independent. How?

  • The council suggests that a director be deemed non-independent if he is or has been directly associated with a substantial shareholder of the company in the current or any of the past three financial years.
  • The CGC also suggests that a director be deemed non-independent if he has served on the board for more than nine years (the first time a tenure for an independent director has been mentioned.)

The CGC intends to put the respective board, on the spot, by recommending that they should identify, in the company’s annual report, each director it considers to be independent.

Michelle Quah of BT reminded us that the definition of an ‘independent’ director (to include independence from substantial shareholders) was proposed and rejected by MOF in the last review of the Code in 2005 on the basis that firstly, there was insufficient ground to assume association with substantial shareholders could impair independence as compared to principal-agent relationship for executive directors. Secondly, MOF further assume that there would be an alignment of interest between the substantial shareholders and the REST of shareholders. (I strongly beg to differ. CH Offshore – substantial shareholders sold but the remaining shareholders get nothing. May I also cite the case with Pacific Century.) Michelle recognised that as possible ‘expropriation of minority investors’ interests by large investors’.

MOF could not take that more stringent definition of independence then possibly due to the fact Singapore’s pool of qualified and quality directors is very limited and that possibly almost every one of them, in one way or another, has or had dealings with one another.

But HK and Malaysia have adopted (but is it enforced?) the more stringent definition by making it mandatory ie. as part of listing rules, instead of Singapore’s more flexible approach as “guidelines”.

Mak Yuen Teen said you can come out with the guidelines and talk about independence but he suggested the following approaches to ensure “independence”.

  • We allow minority shareholders greater say in the election or re-election of independent directors.
  • We must extend the range of sanctions against independent directors who fail to properly discharge their duties and to be more active in taking action against such directors. 

But he concedes that these approaches are beyond the scope of current discussion.

Proposal – Greater disclosure of board and executive remuneration
The CGC suggests that companies disclose the exact remuneration earned by each individual director and the CEO on a named basis, instead of within bands of $250,000 in the current Code.

Michelle again reminded us that the same was proposed and rejected in 2005. The main reason offered by MOF then was to prevent poaching of good directors and consequent escalation of directors’ fees. Huh.. are we still living in stone age? Whether a talent would stay on course would depend on many factors beside money. Furthermore, some of the largest listed companies in Singapore have actually been disclosing the exact remuneration of directors and senior management.

For minority shareholders like myself, we need the information to determine value for money paid. I always find it disturbing to see the substantial shareholders, acting as directors and senior managers, paying themselves more than the profit the company made in a financial year. Another example of expropriation of minority investors by large investors?

Michelle Quah, “Cracking the code of Corporate Governance”, Business Times, June 15, 2011.
Michelle Quah, “Will bold proposals survive the fate of 2005?”, Business Times, June 16, 2011.
Mak Yuen Teen, “Now let’s see the practical impact”, Business Times, June 16, 2011.
Mak Yuen Teen, “Unticking the box”, Business Times, September 6, 2010.

Forecasting and budgeting

Question – Are government officials in the budgeting department poor in forecasting?

The following are Hong Kong government’s experiences:-

  1. In 2009-10 budget, Financial Secretary John Tsang Chun-wah predicted a HK$39.9 billion deficit. But strong growth in income from stamp duty on property and stock transactions, the government may end up with a surplus of more than HK$10 billion.
  2. In 2006, then finance chief Henry Tang Ying-yen predicted a surplus of HK$5.6 billion for the 2006-07 financial year but recorded a HK$58.6 billion surplus.
  3. In 2001-02 budget, the then financial secretary Donald Tsang Yam-kuen predicted a HK$3 billion deficit. The government eventually recorded a HK$63.3 billion deficit.
  4. The best forecast was made by Donald Tsang in 2000. He predicted a HK$6.2 billion deficit for the 2000-01 financial year. The administration ended up with a deficit of HK$7.8 billion.

With another forecast of a budget deficit set to be proved wrong, a senior accountant has suggested the government carry out more frequent reviews of its financial position.

Capitaland and Singapore’s new revenue recognition standard

where was i?

Effective on 1 Jan 2011, Singapore‚Äôs Accounting Standards Council requires that revenue be recognised when control of a property has passed on to the owner. Thus previous year’s figures have to be restated to allow for fair comparison. (Yes, this is additional work for everyone involved in the preparation of financial reporting.)

The purpose of this article is an attempt to understand the possible impact of the standard change to a company in the business of property development and management such as CapitaLand.

Quantify the change
Here are the figures reported by ST April 27, 2011 on CapitaLand’s performance for quarter ended March,

Sales revenue
2010 – $440m ($687.3m before restating)
2011 – $611.5m

2010 – $29.8m ($115.4m before restating)
2011 – $101.5m

Edgar’s observations and analysis
Both sales revenue and profit for Q1 of 2010 declined significantly by 36% and 74% respectively after the change in standard. Thus when you compare current quarter’s performance with that of previous year’s quarter, the management is able to report significant positive change in both sales revenue and profit.

The question is how much of the sales revenue and profit reported for current quarter could be due to revenue and profit “deferred” from previous quarters which we now captured due to the change in accounting standard.

The share price has hardly moved on the reporting. Edgar would like to speculate on possible reasons.

Efficient market hypothesis that we learned in class stated we assume the market is semi-strong in terms of efficiency in the share price reflecting all past, currently and publicly available information. Has the market been able to quantify the possible impact on CapitaLand’s bottomline since the announcement of its new standard adoption last year?

The lack of reaction to the strong figures could be due to other news, prevailing in the market, that are distracting the investors. Since the completion of the Election, property sector has been deemed to have been earmarked for radical changes deemed not conducive for investors.

Taking the more pessimistic stand, we should question whether investors understand the impact of the change in accounting standard. This was highlighted to me by an industry veteran who was very wary of earnings volatility due to the change in standard. The uncles and aunties type of investors may sell their shares unnecessary when a property firm is reporting losses in the current year due to “deferred” recognition of sales revenue and profit.

We await for more clarity.