Overview

1. Introduction to Corporate Governance

Corporate governance refers to the set of systems, principles and processes by which a company is governed.

Within the corporate ecosystem – which includes management, shareholders, auditors, regulators, creditors and other stakeholders – the Board of directors is primarily responsible for the governance of a company.

In general:

The Board appoints and supervises the management of the business and reports to shareholders on their stewardship.
The management operates the day-to-day business, and is accountable to the Board.
The shareholders elect the directors, approve the appointment of the auditors, and satisfy themselves that an appropriate governance structure is in place. Where shareholders are dissatisfied with the way the company is governed, they can constructively engage with the Board to address the issues which they are dissatisfied with, and as a last resort, remove the members of the Board.

Laws and regulations are in place to oversee this closed loop system of governance, and the duties, responsibilities and liabilities of the directors.

The subsequent sections provide the context for corporate governance across the world and Singapore and, especially, for the Singapore Code of Corporate Governance (the “Code”) and the concept of “comply or explain”.

A. CG Guides

Board Guide 1.1: Introduction [Corporate Governance].
Board Guide 1.2: Company Performance [Corporate Governance].
Board Guide 1.3: Regulatory Conformance [Corporate Governance].
Board Guide 4.1 Introduction [Board Duties].

B. Related Articles

“Making ‘ownself check ownself’ work” by Willie Cheng. (148KB)

2. Global Overview of Corporate Governance

The origins of modern corporate governance can be traced to the “principal-agent” relationship.

Over time, different approaches and initiatives – including regulations, Board structures and practices – have evolved to address this problem.

The multiplicity of rules and regulations have, however, led to the “conformance versus performance” conundrum about the role of Boards in the governance of companies.

The principal-agent problem

The principal-agent problem began towards the end of the 19th and beginning of the 20th century when the creation of joint stock companies – and the control of companies shifting into the hands of the managers – effectively separated ownership and control.

In agency theory, the agent, who represents the principal in a particular business transaction, is expected to represent the principal’s best interests without regard for his personal self-interest.

Problems occur when the interests of principal and agent are in conflict. These conflicts can present normally ethical individuals with moral dilemmas. Incentives and disincentives are used so that the agent’s behaviour and interests are redirected and realigned with the principal’s.

In the context of a company, the Board is the agent of shareholders, and management is the agent of the Board. Corporate governance, then, is about the systems, rules and processes that ensure the interests of the various parties are aligned and enforced in an open and transparent way.

Contemporary thinking on corporate governance

Contemporary discussions of corporate governance tend to refer to principles and practices raised in the following documents:

The Cadbury Report (UK, 1992): This report sets out recommendations on the arrangements of Boards and accounting systems to mitigate corporate governance risks and failures. It evolved into the UK Corporate Governance Code (first known as the Combined Code).
The King Report I, II, III and IV (South Africa, 1994, 2002, 2009 and 2016): Listed companies on the Johannesburg Stock Exchange in South Africa are required to comply with the corporate governance requirements of the King Reports, which set benchmarks for their leading international practices in corporate governance.
The G20/OECD Principles of Corporate Governance (1999, 2004 and 2015): Issued by the Organisation for Economic Co-operation and Development (OECD), these principles are often referenced by countries developing local codes or guidelines. Appendix 1C provides an overview and outline of the Principles.
The Sarbanes-Oxley Act (US, 2002): Commonly referred to as SOX, the Act was introduced in the aftermath of the Enron, WorldCom and other scandals. It was an attempt by the US federal government to legislate several of the principles recommended by the Cadbury and OECD reports.
The Dodd-Frank Act (US, 2010): This is a compendium of federal regulations, primarily affecting financial institutions and their customers that the Obama administration passed to try to prevent the recurrence of events that led up to the 2008 Global Financial Crisis.

Board structures

German and English corporate laws have evolved two main forms of Board structures.

The German model is a two-tier system with two separate bodies that operate independently: the Executive Board which comprises executive directors who conduct the day-to-day management of the company; and the Supervisory Board which comprises only non-executive directors that govern the company, and whose duties include hiring and supervising the executive directors and the CEO. This model has been adopted in countries such as Germany, the Netherlands, Finland and China.

The English model is a one-tier system with a single unified Board governing the company. Both executive and non-executive directors sit together on the same Board. This model has been adopted by Singapore, the UK, the US, and most Commonwealth countries.

Conformance and performance

From the perspective of the Board, the scope of its governance responsibilities should cover two areas:

Performance: To ensure that the company’s assets are used efficiently and productively, and in the company’s best interests.
Conformance: To safeguard the interests of shareholders and other stakeholders in compliance with existing regulations.

Rules and regulations, including the Code (the subject of this Guide), fall within the conformance role of the Board.

Notwithstanding the myriad and onerous rules and regulations that demand their time, the Board should not, however, ignore that one of its fundamental responsibilities is the value creation and performance aspect of its role.

A. CG Guides

Board Guide 1.1: Introduction [Corporate Governance].
Board Guide 1.8: Other Jurisdictions [Corporate Governance].
Board Guide 4.1: Introduction [Board Duties].

B. Related Articles

3. Singapore Regulatory Framework

In the context of Singapore, corporate governance practices can be broadly classified in the following conformance continuum:

Legislation and subsidiary legislation: Statutes passed by Parliament (for example, the Companies Act) and subsidiary legislation like rules and regulations (for example, Companies (Accounting Standards) Regulations) that companies must adhere to.
Rules and Codes: Rules and codes issued by a regulatory body under which the company by virtue of membership, statutory duty, or otherwise is subject to (for example, the SGX-ST Listing Rules for a listed company).
“Comply or explain” requirements: Rules and codes issued by a regulatory body which should be either complied with, or an explanation provided for non-compliance (for example, the Code of Corporate Governance, where the Principles are mandatory but the Provisions can be varied with good justification).
Guidance: Recommendations and guidelines on good practices issued by regulatory or professional bodies (such as the Corporate Governance Advisory Committee and SID) with which companies are encouraged to voluntarily comply.

Legislation and subsidiary legislation

Corporate governance practices mandated by legislation are deemed critical.

A combination of commercial and other laws applies to companies. Those concerning listed companies and their directors include:

The Companies Act (Cap 50). This is the basis by which a company is legally registered/incorporated in Singapore. It contains a significant portion of the legal duties and responsibilities that directors of companies must observe.
The Securities and Futures Act (Cap 289). This Act governs all activities pertaining to securities, futures and funds management. Listed companies are specifically included.
Industry-specific legislation. Usually, one or more pieces of legislation cover each regulated industry. For example, the Banking Act (Cap 20) for the banking industry, and the Telecommunications Act (Cap 323) for telecommunications companies.
Legislation applicable to all companies operating in Singapore. Directors should be aware of the large number of laws that apply to commercial and other organisations, such as the Competition Act (Cap 50B) and the Personal Data Protection Act (Cap 26).

Directors need to be aware of the various legislation that apply to the companies of the Boards on which they serve. They should be familiar with the duties and disclosure requirements expected of directors. They should seek guidance from the Company Secretary or the respective compliance officers on statutory compliance issues, but they are ultimately responsible for their companies complying with legal obligations.

Rules and Codes

Executive authorities and regulatory agencies may also issue rules and codes. Whilst these are not statutory in nature, breaches could attract sanctions such as reprimands and monetary penalties.

An example would be the SGX-ST Listing Rules which include ongoing disclosure obligations and other requirements on the issue of additional securities, major transactions, interested person transactions, trading halts, and de-listings.

Additionally, companies engaging in capital market activities, including fundraising, should ensure compliance with other relevant rules and codes. These include:

The Singapore Code on Takeovers and Mergers.
The Code of Collective Investment Schemes.

"Comply or explain" codes

“Comply or explain” is a middle ground between mandatory rules and the voluntary adoption of good practices of corporate governance.

Here, the regulator defines the principles and practices of good governance in a code, and companies are required to be transparent in the way that they comply (or do not comply) with them.

Refer to sections 4 and 5 for a detailed explanation of the history of Singapore Code, and the concept of “comply or explain”. Observations of the Principles is mandatory, but companies may choose to vary from the Provisions with full explanation on how the alternative action adopted meets the intent of the relevant Principle.

Guidance

From time to time, industry bodies or regulators issue guidance on leading practices which are not mandatory, but they are useful for companies to understand, review and adopt according to their circumstances.

One example is the Practice Guidance issued by the MAS on 6 August 2018.

SID also periodically issues succinct and practical Statements of Good Practice on fundamental issues of board performance, accountability and corporate responsibility.

A. CG Guides

Board Guide 1.3: Conformance [Corporate Governance].
Board Guide 1.4: Legislation [Corporate Governance].
Board Guide 1.5: Regulations [Corporate Governance].
Board Guide Appendix 1E: List of Key Legislations [Corporate Governance].
Board Guide Appendix 1F: Outline of the Structure and Content of the Companies Act [Corporate Governance].
Board Guide Appendix 1G: Outline of SGX Listing Rules [Corporate Governance].
Board Guide Appendix 1H: List of Key Regulations [Corporate Governance].

B. Related Articles

4. History of the Singapore Code

The Singapore Code of Corporate Governance applies on a “comply or explain” basis, similar to codes issued in the UK and other countries.

The Code was introduced in 2001 and updated in 2005, 2012 and 2018.

2001 Code

The first Code was introduced by the Corporate Governance Committee in March 2001. It came into effect on 1 January 2003 and applied to all listed companies in Singapore.

2005 Code

In August 2002, the Council of Corporate Disclosure and Governance (CCDG) was formed to prescribe accounting standards, strengthen the framework on disclosure practices and reporting standards, and to review and make recommendations to the Ministry of Finance (MOF) about revisions to the Code.

In 2005, the CCDG reviewed the 2001 Code, and a revised Code was subsequently issued by the MOF in July 2005.

The CCDG was dissolved in 2007 and the Monetary Authority of Singapore (MAS) and the Singapore Exchange Ltd (SGX) were vested with oversight of the corporate governance of listed companies. This move clarified and streamlined responsibilities for corporate governance matters for listed companies, bringing it under the sectoral regulator.

2012 Code

In February 2010, the MAS established a Corporate Governance Council (Council) to promote among listed companies in Singapore a higher standard of corporate governance. As part of its work, the Council conducted a comprehensive review of the 2005 Code.

In May 2012, following a public consultation and recommendations by the Council, the MAS issued a second revision of the Code. The revisions effected changes in several key areas including director independence, Board composition, multiple directorships, remuneration practices and disclosures, risk management, and shareholders’ rights and roles. The Council was subsequently dissolved.

2018 Code

In February 2017, the MAS formed a Corporate Governance Council (Council) to review the CG Code so that it remains relevant, progressive and supports business growth and innovation. The Council also reviewed the “comply or explain” regime and the need for a supportive corporate governance ecosystem.

In August 2018, following a public consultation and recommendations by the Council, the MAS issued a third revision of the Code, and SGX made consequential changes to some of its listing rules.

The revisions to the Code include:

A streamlining of the “comply or explain” regime for more thoughtful and meaningful application of key tenets of corporate governance, where Principles are to be mandatorily complied with, and Provisions are actionable steps to be complied with or satisfactorily explained by alternative steps.
The language in the Code shifted away from an instructive style.
The introduction of non-binding Practice Guidance providing guidance to companies on compliance with the Code and setting out best practices which companies may choose to adopt on a voluntary basis. No explanations are required if companies do not wish to adopt the guidance.
Specific changes in the following key areas: director independence, board composition, remuneration disclosures, risk management, and stakeholder engagement.

The consequential changes that SGX made to its Listing Rules include:

Prescribed training for first-time listed company directors.
Criteria for director independence and proportion of independent directors on a Board.
Adequacy and effectiveness of internal controls and risk management systems.
Mandatory internal audit function.
Disclosure of reasons for non-payment of dividends.

The Council was dissolved following the issuance of the revised 2018 Code. MAS also accepted the Council’s recommendations to form a Corporate Governance Advisory Committee to promote good corporate governance practices. As an advisory body, the Committee does not have any formal regulatory powers, but focuses on advocating positive corporate governance practices, setting benchmarks and providing guidance to companies where there is ambiguity.

A. CG Guides

Board Guide 1.1: Introduction [Corporate Governance].

B. Related Articles

5. The “Comply or Explain” Regime

The Code of Corporate Governance applies to all listed companies in Singapore on a “comply or explain” basis. This means that companies must explain their corporate governance practices with specific reference to the Principles and Provisions contained in the Code. Observation of the Principles in mandatory. Where companies vary from a particular Provision, they are to explain how their practices are nevertheless consistent with the intent of the relevant Principle.

Background

The “comply or explain” approach was first introduced in the Cadbury Code of 1992. Since then, it has been adopted by many governance codes in Europe and Commonwealth countries.

Singapore adopted it when the Code of Corporate Governance was introduced in 2001, and which became operational in 2003. The Code has since been updated thrice, in 2005, 2012 and 2018.

The “comply or explain” approach is often contrasted with the more prescriptive approach found in the Sarbanes-Oxley Act of 2002 (SOX) and Dodd-Frank Act of 2010 in the US, which rely largely on legislation and penalties such as fines and imprisonment.

Rationale

The rationale for the approach is simply that Principles and practices of good governance are defined by the regulator, and companies should be transparent in how they comply (or do not comply) with them. The Principles of the Code are the core broad principles of corporate governance and are mandatory. Provisions are actionable steps to support compliance with the Principles. A departure from a Provision of the Code is not presumed to be a breach. Rather, companies should provide insights into their approach for improving their corporate governance.

The benefits of the “comply or explain” approach are:

Proportionality. Imposing mandatory requirements may be excessively burdensome and costly especially for smaller companies. In such cases, companies need to justify their non-compliance.
Flexibility for companies. It avoids the disadvantages of a “one size fits all” solution that may not be appropriate when companies differ in size, maturity, pedigree and industry. While it encourages companies to follow the practices laid out in the Code, it allows the company to decide how best to implement them in a way that fits its specific culture and circumstances.
Innovation. By recognising that alternative approaches are justifiable if they can achieve equally good governance and by allowing for alternative approaches and new ideas, “comply or explain” encourages both companies and regulators to be pro-active and to introduce innovative or new ideas.
Long-term learning. By regularly thinking through how best to address the purpose and principles of corporate governance, the hope is that companies will internalise these principles and act out of their own will and long-term self-interest rather than being forced to change through defined rules. In a complex area like corporate governance, the consensus is that this can be a more effective approach.

Making “comply or explain” work

For “comply or explain” to work, there must be trust in the corporate governance ecosystem. All players and stakeholders need to do their part.

Regulators. The role of the regulator is to frame the Principles and Provisions in the Code, and to periodically update these to ensure their continued relevance while continually monitoring compliance with the Code.
Boards. Companies and their Boards need to commit to good governance and seek to comply with the Code. They should not regard the Code as a necessary evil. Rather, they need to look at the bigger picture – good governance practices that should be implemented for the long-term interests of the company and all stakeholders.
Investors. Shareholders, too, benefit from good corporate governance. They too must share some responsibility beyond just receiving reports and making self-interested investment decisions. They can help companies improve their governance standards by engaging with companies and raising relevant questions at the AGM and other appropriate forums. Institutional investors, in particular, have the means to more actively and substantively engage companies about their practices.
Other players. Other players, such as the media, securities investor associations, trade bodies and industry watchers should all work to foster good corporate governance. The SID, for one, works actively through education, advocacy, corporate governance scorecards and awards.

Complying with “comply or explain”

At its core, the revised Code espouses broad principles of good corporate governance, which are overarching and non-disputable statements. Compliance with, and observation of, these Principles is mandatory.

The Provisions of the Code are actionable steps that guide companies in complying with the substance of the Principles. However, variations from Provisions are acceptable to the extent that companies explicitly state and explain how their alternate practices are consistent with the aim and philosophy of the Principle in question. Explanations for such variations should be comprehensive and meaningful.

The “comply or explain” aspect of the Code is effected through the SGX-ST Listing Manual which is mandatory. Specifically, a company is required to “describe in its annual report its corporate governance practices with specific reference to the Principles and the Provisions of the Code, [and] it must explicitly state, in its annual report, the Provision from which it has varied, explain the reason for variation, and explain how the practices it had adopted are consistent with the intent of the relevant Principle” (MR 710 and CR 710).

Read closely, this listing rule specifies several requirements.

The first is that companies must describe their corporate governance practices with specific reference to each Principle and Provision of the Code, and compliance with the Principles is compulsory.

The second is that companies should seek to adopt, whenever possible, the practices embedded in the Code Provisions.

And when they cannot, the third requirement is that such variations are acceptable only to the extent that companies explicitly state and explain how their practices are consistent with the aim and philosophy of the Principle in question. The explanation of variations should be comprehensive and meaningful.

A comprehensive and meaningful explanation should have the following characteristics:

The explanation should apply to variations from the Provisions of the Code, not to non-compliance or variations from its Principles, which are mandatory.
It should be substantive and not perfunctory. The expectation is that companies explain how the alternative approaches would comply with the relevant Principle of the Code.
It should be specific to the company’s position. Avoid boilerplates.
It needs to:
- Set the context and historical background, if appropriate.
- Provide a convincing rationale for the action taken by the company.
- Describe mitigating action to address any additional risk and to maintain conformity with the relevant Principle.

A. CG Guides

Board Guide 1.6: The “Comply or Explain” Regime [Corporate Governance]
Board Guide Appendix 1I: “Comply or Explain” – An Explanation of the Regime [Corporate Governance]
Board Guide Appendix 1J: “Comply or Explain” – Examples of Non-Compliance [Corporate Governance]
Board Guide Appendix 1K: Outline of the 2-18 Code of Corporate Governance

Overview

1. Introduction to Corporate Governance

A. CG Guides

B. Related Articles

2. Global Overview of Corporate Governance

The principal-agent problem

Contemporary thinking on corporate governance

Board structures

Conformance and performance

A. CG Guides

B. Related Articles

3. Singapore Regulatory Framework

Legislation and subsidiary legislation

Rules and Codes

"Comply or explain" codes

Guidance

A. CG Guides

B. Related Articles

4. History of the Singapore Code

2001 Code

2005 Code

2012 Code

2018 Code

A. CG Guides

B. Related Articles

5. The “Comply or Explain” Regime

Background

Rationale

Making “comply or explain” work

Complying with “comply or explain”

A. CG Guides

B. Related Articles

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Corporate Governance (CG) Guides Series for Boards in Singapore

Singapore Institute of Directors