14 February 2018

Code of Corporate Governance to Be Amended

The element of independence on listed boards is proposed to be strengthened and made mandatory. These proposals are among those made by the Corporate Governance Council in its review of the Code of Corporate Governance. Other key proposals include requiring companies to explain how their governance practices uphold the corporate governance principles in the Code even if they depart from its specific requirements.

The Corporate Governance Council (CG Council) has reviewed and proposed revisions to the Code of Corporate Governance (Code). The CG Council and the Singapore Exchange (SGX) have issued a consultation paper on the proposed recommendations. The key proposals and changes are summarised below.

Certain Requirements of the Code to Be Made Mandatory

The requirements of the Code are not mandatory but apply to issuers on a comply-or-explain basis. The Consultation Paper proposes making some of the requirements mandatory. This will be done by shifting them from the Code to the Listing Rules. Of the requirements of the Code that are proposed to be made mandatory by incorporating them into the Listing Rules, some are in addition proposed to be amended as set out in the table below:

Current Requirement Proposed Change
A director is not to be considered an independent director if he is a 10% shareholder or an immediate family member of a 10% shareholder of the company. The threshold is proposed to be lowered from 10% to 5%. Hence, a director should not be considered an independent director if he is a 5% shareholder or an immediate family member of a 5% shareholder of the company. It is proposed that companies be given three years to comply if the proposal is adopted.
A company may still consider an independent director who has served on its board beyond nine years as independent. However, it should subject his independence to rigorous review.

An independent director who has served on a company’s board for more than nine years should either:

  • No longer considered to be independent (i.e., there will be a hard limit of nine years); or
  • Be allowed to be appointed as an independent director only if the appointment is approved by a majority of the company’s shareholders as well as a majority of the company’s non-controlling shareholders.

A non-controlling shareholder is one that holds less than 15% of the company’s shares.

A company should provide training to a director who has no prior experience as a director of a listed company in areas such as accounting, legal and industry-specific knowledge as appropriate. The training to be provided to such a director will be prescribed by the SGX instead.
Key information regarding directors must be disclosed in the company’s annual report.

Disclosure is still required. What has been proposed to be amended is where the information is to be disclosed:

  • Information on each directors’ designations (i.e., independent, non-executive, executive) and roles (e.g., as members of committees) will still need to be set out in the annual report.
  • Other key information (e.g., academic and professional qualifications, shareholding in the company and its related corporations) must be disclosed instead in the resolution for appointment or re-appointment of the director.
The company’s annual report has to contain an opinion of the board as to the effectiveness and adequacy of the company’s internal controls. The opinion should include the concurrence of the audit committee. The opinion should, in addition, deal with any weaknesses in the effectiveness and adequacy of the company’s internal controls if any have been found. The board must also set out the steps that it has taken to address the weaknesses.
The company should establish an effective internal audit function that is adequately resourced and independent of the activities it audits. The audit committee must comment on whether the internal audit function is independent, effective and adequately resourced. The comment must be disclosed in the company’s annual report.

The following Code requirements are proposed to be made mandatory by incorporating them into the Listing Rules; companies that have chosen to explain rather than comply with these requirements may no longer continue to do so but will have to comply:

  • Independent directors must make up at least one-third of the board.
  • The following directors cannot be regarded as independent:
    • A director who is or has been employed by the company or any of its related corporations for the current or any of the past three financial years; and
    • A director who has an immediate family member who is, or has been in any of the past three financial years, employed by the company or any of its related corporations and whose remuneration is determined by the remuneration committee.
  • Where dividends are not paid, companies must disclose their reasons together with the announcement that dividends are not being paid.
  • The board must disclose the relationship between the chairman and the chief executive officer if they are immediate family members.
  • All directors must submit themselves for re-nomination and re-appointment at regular intervals and at least once every three years.
  • Companies must establish a nominating committee, remuneration committee and audit committee.

Amendments to Existing Requirements of the Code

A number of the Code’s existing requirements are proposed to be amended as set out in the table below:

Existing Requirement Proposed Change

The independent directors should make up at least half of the board in the following situations:

  • the chairman of the board and the chief executive officer (or equivalent) is the same person;
  • the chairman and the chief executive officer are immediate family members;
  • the chairman is part of the management team; or
  • the chairman is not an independent director.

In these situations, the independent directors should make up at least the majority of the board rather than simply half.

This will affect in particular boards with an even number of directors. A four-director board with a chairman that is not an independent director, for example, must currently have at least two independent directors. Under the proposed change, that board must have three independent directors in order for there to be a majority of them.

The board and its board committees should comprise directors who as a group provide an appropriate balance and diversity of skills, experience, gender and knowledge of the company. The CG Council has not proposed imposing diversity quotas but has recommended that companies should disclose their board diversity policy and the progress made in implementing the policy.
The audit committee must not comprise former partners/directors of the company's existing auditing firm/corporation within a period of 12 months commencing on the date of their ceasing to be a partner/director of the auditing firm/corporation; and in any case for as long as they have any financial interest in the auditing firm/corporation. The “cooling off” period should be extended from 12 months to two years.
The company’s internal auditor should report to the audit committee’s chairman, and also report administratively to the chief executive officer. The internal auditor should no longer be required to report administratively to the chief executive officer.
The annual remuneration report should disclose the details of the remuneration of employees who are immediate family members of a director or the chief executive officer, and whose remuneration exceeds SGD50,000 during the year. Disclosure should be in incremental bands of SGD50,000.

Three changes have been proposed:

  • The employees whose remuneration should be disclosed should also include employees who are substantial shareholders or are immediate family members of substantial shareholders.
  • Remuneration need only be reported if it exceeds SGD100,000 annually, rather than SGD50,000 annually.
  • Disclosure may be made in incremental bands of SGD100,000 rather than SGD50,000.

The following new provisions to the Code are proposed and will apply on a comply-or-explain basis:

  • Directors with a conflict of interest should recuse themselves from meetings and decisions involving the issues of conflict.
  • The vote of non-controlling shareholders in the appointment and re-appointment of any independent directors should be separately disclosed.
  • Directors who are independent from any management and business relationship with the company should make up a majority of the board.
  • The duties of the audit committee should also include reviewing the assurance from the chief executive officer and the chief financial officer on the financial records and the financial statements.
  • The company should give shareholders a balanced and understandable assessment of its performance, position and prospects.
  • The company should explain the reasons and material implications of resolutions that are bundled.
  • Directors’ attendance at general meetings of shareholders should be disclosed in the annual report.
  • Minutes of general meetings of shareholders should be published on the company’s corporate website as soon as practicable.
  • The minutes should record substantial and relevant comments or queries from shareholders and responses from the board and management.
  • The company should communicate its dividend policy.
  • The company’s investor relations policy should set out a mechanism through which shareholders may contact the company with questions and through which the company may respond to the questions.
  • The company should have arrangements in place to identify its material stakeholder groups and to manage its relationships with such groups.
  • The company should disclose its key areas of focus in relation to the management of stakeholder relationships during the reporting period.
  • The company should maintain a current corporate website that allows for all stakeholders to stay informed of material updates in a timely manner.

The requirement of comply-or-explain that will continue to apply to the Code is proposed to be modified. Currently, where a company deviates from any provision of the Code, it is required to disclose the deviation and give an appropriate explanation for the deviation. It is proposed instead that where companies have not adopted a specific provision of the Code, they must explain how their governance practices are consistent with the relevant principle of the Code applicable to that provision.

Prakash Segaran +65 6671 6060
Partner, Singapore prakash.segaran@allenovery.com
Lian Chuan Yeoh +65 6671 6075
Counsel, Singapore lianchuan.yeoh@allenovery.com
Wee Teck Lim +65 66716142
Professional Legal Support, Singapore WeeTeck.Lim@allenovery.com

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