Over the last two weeks, the Securities Investors Association, Singapore (SIAS) held its corporate governance week, and last week, CPA Australia held its annual Singapore Congress. Though corporate governance and human capital management may not be everybody’s cup of tea, these conferences turned out to be quite informative, and provided a valuable opportunity to reflect on governance issues related particularly to regions in Asia, as well as those more global in character.
Governance issues have a profound effect on business strategy, particularly where multi-national enterprises are concerned, especially if they have subsidiaries or associates in jurisdictions with different priorities. Business strategy, in turn, determines human capital imperatives, strategies, routines and processes.
HR function relevance is a continuing issue (a recent EIU study, sponsored by KPMG found that only 17% of “C” suite executives thought that their HR teams “did a good job”). Human Capital Management needs to focus on strategic business issues. For example, over focusing HR activity on issues of executive compensation will not increase the perception of HR function relevance, if related party transactions and the impact of dominant shareholders on senior selection decisions are the issues of concern in a particular jurisdiction.
Not surprisingly, one important topic that came up at both events focused on issues surrounding the different ownership structures of corporations throughout Asia. Compared with the U.S. or U.K., the presence of "dominant" shareholders is much more prevalent in Asia.
It’s worth noting, however, that the U.S. and the U.K. are really the exceptions in this case. In most jurisdictions, the existence of dominant shareholders (frequently families, but also governments/sovereign wealth funds), is the norm. About, 82.5% of German listed companies, 66% of Italian listed companies, and 64% of Swedish listed companies have a “blocking shareholder minority” of at least 25%. Even if a “majority control block” is used as the test, this still means that there are “dominant” shareholders in about 64% of German listed companies, 56% of Italian ones, and 26% of Swedish ones. In nine East Asian countries, it was discovered that a single shareholder holds control over more than two-thirds of listed firms.
The different ownership structures give rise to different governance priorities for regulators and shareholders. For example, executive compensation is, frankly, not currently seen as a major area of concern, and the dominant shareholders, in most cases, keep a tight rein on remuneration.
For many of these companies, in fact, what worries most minority shareholders are related party transactions. To this point, the Singapore government has recently announced that it intends to make changes to the Companies Act that, amongst other things, will make CEO’s as equally liable for non-disclosure and other related party transactions as directors. This will, undoubtedly, have implications for executive compensation structures and employment contracts.
A connected issue that causes concern for minority shareholders is the operation of the nominating committee. Through the operation of this committee, it is possible for the dominant shareholder to effectively "control" the membership of the board through influence over the "independent" directors.
In Malaysia, as well as in Singapore, the operation of the Nominating Committee is receiving increasing scrutiny. Through changes that have been enacted this year to the Code of Corporate Governance, Malaysian companies now need to form “Nominating Committees, chaired by a senior independent director, who is responsible to oversee the selection and assessment of directors. The Nominating Committee is charged with developing a set of criteria including policies formalizing its approach to diversity of the board…”. This increasing focus on the role of the Nominating Committee will drive responsibilities in “human capital management in the Boardroom and ‘C’ suite.”
The other major theme was about the “dilemma of foreign listings.” This term really refers to a series of scandals related to so-called “S chips” (companies listed on the Singapore exchange with owners and/or most of their business in China).
The most prominent of these recent scandals has been “China Sky,” whose shares were suspended after the company refused to conduct a special audit ordered by SGX. This scandal resulted in the resignation of the company’s directors. SIAS estimates that there are nine companies currently suspended by the SGX, leaving about 30,000 shareholders in limbo. In effect, share suspensions penalize the shareholders who may, in fact, be the main victims.
A number of proposals have been made to address the “foreign listings dilemma,” including some from SIAS:
- Prohibit the resignation of the CEO and CFO during the life of any notice of compliance issued by the exchange, other than for serious illness;
- Do not list companies from countries without extradition treaties with Singapore or at least disclose the absence of such a treaty in the prospectus;
- Require a foreign company listing on SGX to provide a bank guarantee or equivalent to ensure compliance with local laws and listing rules;
- Prohibit the board from transferring monies raised from the Singapore market unless the Audit committee chair and the independent directors affirm that the transfer is bona fide, as described in the prospectus; and
- Require board members, as well as both the CEO and CFO, to agree to submit to arbitration in Singapore in disputes relating to the listing rules and related laws, and to compensate shareholders for losses involving fraud or mismanagement to a level set by the arbitrator (the arbitration to be part of the listing conditions and only issuers from New York Convention party countries to be accepted).
Whether or not some or all of these proposals would be practical or completely effective is moot, but they do show that the problem of foreign listings, especially from China, is beginning to attract attention in Singapore. Whatever proposals are adopted, there will be implications for individuals as well as companies.
Do you believe these types of regulations will help solve the issues surrounding different ownership structures and related party transactions? Would love to hear your thoughts.
by Christopher Bennett (Senior Fellow, Human Capital at The Conference Board)