SGX needs still-tougher governance rules to attract the smart money

[SINGAPORE] Tan Boon Gin had a line ready at Tuesday’s (Oct 27) briefing, and told reporters they could quote him on it: “Boilerplate disclosure is better than no disclosure at all.”

The honesty was refreshing, and it set the bar for the whole exercise.

The Singapore Exchange Regulation (SGX RegCo) chief was at the launch of a joint consultation with the Corporate Governance Advisory Committee (CGAC) on changes to the Code of Corporate Governance and the listing rules, open until Jan 27.

The pitch is aimed at institutional investors. The way Tan sees it, the fund managers hired under the Equity Market Development Programme want companies with growing profits, clear communication and boards that create value.

Think of it as a football league rewriting its rule book to win over big-money sponsors. The question is which rules get rewritten.

The biggest new rules are about who sits on which board committee.

The audit, nominating and remuneration committees would each need an independent chair and a majority of independent directors. That requirement moves from the comply-or-explain code into the listing rules, where it becomes compulsory. So does the need for a lead independent director when the chairman is not independent.

Directors would also be capped at five listed boards, though whether that is a hard rule or a soft one is still open.

But figures provided following the briefing reveal that an independent director already chairs the nominating committee at 95.9 per cent of listed companies. For audit and remuneration committees, the figures are 97.5 and 96.5 per cent. Independent majorities on these committees run from 98.5 to 99.2 per cent.

As for the cap, 25 directors held more than five SGX-listed board seats in 2024.

So the new rules mostly tell teams to wear shin pads when almost everyone already has them on.

The way CGAC chairman Bob Tan describes it, the market wanted evolution rather than revolution, and the focus groups felt the code needed neither a major overhaul nor new requirements.

The question of independence

Of the new board rules, one reaches more companies than the rest: the requirement for a lead independent director if the chairman is non-independent.

The Singapore Institute of Directors’ latest Singapore Directorship Report found that 70 of 615 listed entities had a non-independent chairman and no lead independent director, even though the code asked for one.

Comply-or-explain clearly did not work, and making it a rule is overdue.

The problem, though, gets a gentler touch in the proposed changes.

The same report found that 18 per cent of board chairs were also the CEO. In other words, in nearly one in five listed entities, the person running the business also chairs the board meant to keep watch on them.

Wilmar International and Yangzijiang Shipbuilding, two of the bigger names on the bourse, both have one person in both jobs.

The UK and Australia expect the chairman to be independent. The committee considered that and declined, for now, citing Singapore’s market landscape. At the briefing, that was explained as meaning founder-led, family-controlled companies, where the founder may well add value in the chair.

Beyond appointing a lead independent director, such companies need only explain how one person can do both jobs, and what safeguards are in place. The CEO gets to keep the referee’s whistle, as long as he says why.

SGX RegCo’s Tan said that boards must be able to challenge controlling shareholders if they are to create value for all shareholders. But that is hard to do when the same person sets the board agenda, decides what papers directors see, and often holds the biggest stake.

Under another new provision, that person would also make sure the board’s annual review gets done.

Drawing the smart money

None of this makes the proposals bad. Telling shareholders whether the nominating committee backed a director’s appointment is useful. So is naming the roles of family members on the payroll.

But if nearly every company already has independent committee chairs, board structure is not what keeps big funds away.

What worries them is how controlled companies use their cash and treat minority shareholders. They also notice when a company gets away with a weak explanation.

Three changes would help.

First, comply-or-explain should be given some teeth. Companies today can get away with a lazy explanation.

The Tokyo Stock Exchange publishes a list of companies that have set out plans to address their cost of capital and share price, and the names missing from it are easy to spot. SGX RegCo could do something similar, and say publicly when an explanation falls short.

Second, make companies talk about returns.

The proposed guidance on capital management policies says the measures of capital efficiency a board monitors “could” be part of the policy. Turn that into a must. Ask for a return target and a cost of capital, and have companies report against both each year.

Third, give minority shareholders a real say on the directors meant to protect them.

Singapore tried a two-tier vote for directors who had served more than nine years. It became a rubber stamp. Big shareholders who sat off the board could still vote, and few minorities bothered to turn up.

A version that shuts out the controller, and covers every independent director in a controlled company, could be worth a try. Even then, it would mostly serve as a warning light.

To be fair, governance alone will not bring the big funds in. Plenty of SGX stocks are too small for them anyway.

But governance is the part that regulators control, and most of its new hard rules cover ground companies already hold.

Tan is right that boilerplate beats silence. But silence was never the problem here. Singapore annual reports are already thick with boilerplates, and nobody pays a price for it.

Until a weak explanation costs a company something, the funds will read the reports and put their money somewhere else.