Recent Issues in Corporate Governance

Transcription

1 Recent Issues in Corporate Governance Practice Law Seminar 2018 Jerry Koh 1 August 2018

2 KEY THEMES Introduction Singapore Code of Corporate Governance Diversity Sustainability Reporting Dual Class Shares Shareholder Activism Corporate Governance & M&A 2

3 INTRODUCTION TO CORPORATE GOVERNANCE IN SINGAPORE 3

4 INTRODUCTION TO CORPORATE GOVERNANCE IN SINGAPORE One of the most transparent and established regimes in Asia Pacific Corporate Governance Watch 2016: 1 st of 11 countries in the region Other countries involved in the ranking: 2. Hong Kong 7. India 3. Japan 8. Korea 4. Taiwan 9. China 5. Thailand 10. Philippines 6. Malaysia 11. Indonesia Transparency International s Corruption Perceptions Index 2017: 6 th of 180 countries Singapore ranked after: 1. New Zealand 2. Denmark 3. Finland; Norway; and Switzerland (tied) World Bank s Ease of Doing Business Ranking 2018: 2 nd of 190 countries Singapore ranked after: 1. New Zealand 4

5 INTRODUCTION TO CORPORATE GOVERNANCE IN SINGAPORE Our corporate governance regime comprises a mix of the following rules and guidelines: Mandatory rules Comply or explain provisions Best practice recommendations 5

6 SINGAPORE CODE OF CORPORATE GOVERNANCE 6

7 SINGAPORE CODE OF CORPORATE GOVERNANCE Aims To support corporate performance and innovation To strengthen investor confidence in Singapore capital markets Timeline: 2001 Introduction of the Code by the Corporate Governance Committee 2003 The Code came into effect on 1 Jan Issuance of revised Code 2012 Issuance of a second revised Code 2018 Consultation on reviewing the Code Anticipating a third revised Code soon 7

8 CG COUNCIL S PUBLIC CONSULTATION ON THE CG CODE In Jan 2018, the Corporate Governance Council (the CG Council ) launched a public consultation on changes to the Code of Corporate Governance (the CG Code ) Rationale: To make the comply or explain regime under the Code more effective Enhancing corporate governance standards via three levers : 1. Focusing on Singapore s context 2. Strengthening board quality 3. Fostering a supportive eco-system 8

9 CG COUNCIL S PUBLIC CONSULTATION ON THE CG CODE Comply-or-explain regime will be further clarified / revised The proposed revised CG Code is structured into 13 overarching Principles, each comprising detailed Provisions Current CG Code Proposed Framework (Multi-tier structure) Principles and Guidelines: Comply or explain any deviation Principles: Mandatory compliance Provisions: Comply, or if there is variation, explain (i) reason for variation; and (ii) how the practice is consistent with intent of the relevant Principle Practice Guidance: Non-binding guidance and best practices 9

10 CG COUNCIL S PUBLIC CONSULTATION ON THE CG CODE Comply-or-explain regime will be further clarified / revised 13 Principles Overarching and non-disputable statements: 1. Effective Board responsible for company s long-term success 2. Appropriate balance of independence and diversity on the Board 3. Clear division of responsibility between Board and Management 4. Formal and transparent process for directors appointment 5. Formal annual assessment of performance 6. Formal, transparent procedure for remuneration policy 7. Remuneration proportionate to company performance 8. Transparent on remuneration policies 9. Governance of risk to safeguard interests of company and shareholders 10. AC which discharges its duties objectively 11. Treats shareholders fairly and equitably 12. Shareholder communication and participation 13. Inclusive approach by considering needs of material stakeholders 10

11 CG COUNCIL S PUBLIC CONSULTATION ON THE CG CODE Baseline market practices to be shifted to the SGX Listing Manual There are Guidelines in the current CG Code which are in effect important baseline market practices CG Council has recommended shifting them to the SGX Listing Manual for mandatory compliance Baseline market practices to be mandatorily complied with: 1) Induction for incoming directors 2) Independent directors 3) Identification of independent directors in the annual report 4) Baseline tests of director independence 5) Relationship between Chairman and CEO 6) 9-year rule 7) Board committees 8) Directors re-nomination and re-appointment 9) Key information on directors 10) Adequacy and effectiveness of internal controls 11) Internal audit 12) Disclosure of reasons for non-payment of dividends 11

12 DIVERSITY 12

13 DIVERSITY The call for diversity Increasingly recognised as a feature of corporate governance across countries Diversity enhances ability to identify opportunities and manage risk Gender Diversity: Female independent directors have a positive direct effect on companies financial performance (NUS Centre for Governance, Institutions and Organisations, 2018) Adding one female independent director, on average, is expected to improve financial performance by 11.8% Age Diversity: People from different age groups bring different life experiences and perspectives to the table 13

14 GENDER DIVERSITY Diversity Action Committee ( DAC ) Established in 2014 by Mr Chan Chun Sing, then Minister for Social and Family Development Aim: To address the under-representation of women on SGX-listed boards Hop, skip and jump approach to raise women s participation: Triple-tier target of 20% by 2020, 25% by 2025 and 30% by 2030 Cf Current women representation on boards: Source: DAC, 2018; Straits Times graphics 14

15 GENDER DIVERSITY Current women representation on boards Fewer all-male boards among Singapore-listed companies: Source: DAC, 2018; Straits Times graphics 15

16 GENDER DIVERSITY California experience: Proposed board quotas In May 2018, the California State Senate passed a bill for board quotas If enacted, a public company with shares listed on a major US stock exchange that has principal executive offices in California would need to have: at least one woman on its board by end-2019; if company has five directors, at least two female directors by end-2021; if company has at least six directors, at least three female directors by end Rationale Studies indicate that companies perform better with women on their boards More female directors would be beneficial to California s economy, yet progress towards gender parity is too slow As of June 2017, 26% of California public companies in Russell 3000 had no female directors, while women made up 15.5% of directors on boards with at least one woman Controversy California Chamber of Commerce filed an opposition letter arguing that the bill would violate constitutional law and California civil rights law, on the basis that it may require male directors to be displaced by female directors 16

17 GENDER DIVERSITY Singapore experience: No plans for board quotas In 2014, the Diversity Task Force regarding Women on Boards did not recommend board quotas Noted that the causes of poor gender diversity are complex and intertwined, e.g.: Lack of awareness of importance of gender diversity Over-reliance on personal networks to source for directors Women who are capable of serving on boards may not wish to do so Instead, recommended multi-stakeholder approach to address root causes of poor gender diversity Proposed allowing these measures to run their course before assessing if quotas are needed DAC s view on board quotas Meeting numbers does not guarantee that benefits follow DAC is interested in women on boards for the benefits that they would bring But DAC and regulators have not closed the door on the possibility of board quotas 17

18 AGE DIVERSITY Age diversity Benefits of having Board and Board committees with directors of different ages Helps companies to keep pace with fast changing trends and developments in the preferences and behaviour of different generations of consumers; and Helps companies develop capabilities for the future economy Proposed CG Code expressly contemplates age diversity: The Board and board committees are of an appropriate size, and comprise directors who as a group provide the appropriate balance and mix of skills, knowledge, experience, and other aspects of diversity such as gender and age, so as to avoid groupthink and foster constructive debate. 18

19 SUSTAINABILITY REPORTING 19

20 SUSTAINABILITY REPORTING What is sustainability reporting? Sustainability reporting: Publication of non-financial information such as environmental, social and governance ( ESG ) information in a comprehensive and strategic manner Drivers: Environmental concerns Demand by investors and other stakeholders for more information and transparency 20

21 SUSTAINABILITY REPORTING SGX s introduction of mandatory requirements in mid-2016 Sustainability reporting required for financial years ending on or after 31 December 2017 Issuers to disclose any deviation and describe its actual practice, with reasons for such deviation Rule 711B of the SGX Listing Manual requires description of sustainability practices based on five primary components Prior to the SGX s requirements for mandatory sustainability reporting: Out of 502 Mainboard-listed companies on the SGX-ST in 2015, 186 companies voluntarily communicated sustainability, constituting 37.1% of the companies (ASEAN CSR Network & Centre for Governance, Institution and Organisations Report, Oct 2016) 21

22 SUSTAINABILITY REPORTING SGX s introduction of mandatory requirements in mid-2016 Five primary components under the SGX Listing Manual: Primary Component Disclosures a) Material ESG factors Reasons for each material ESG factor and selection process b) Policies, practices and performance Issuer's policies, practices and performance in relation to the material ESG factors (both descriptive and quantitative) c) Targets Targets for the forthcoming year d) Sustainability reporting framework Sustainability reporting framework(s) to be selected Should be suited to issuer s industry and business model Disclose reasons for choosing the framework(s) and the extent of the issuer's application of the framework(s) e) Board statement Board statement, stating that the sustainability report complies with primary components, or has otherwise explained alternative practices 22

23 SUSTAINABILITY REPORTING Board statement and its implications Board responsibility SGX Listing Manual imposes on the Board ultimate responsibility for the issuer s sustainability reporting Requirement to disclose Board statement under the SGX Listing Manual: The sustainability report should contain a statement of the Board on the Board having considered sustainability issues as part of its strategic formulation, determined the material ESG factors and overseen the management and monitoring of the material ESG factors. (Rule 711B(1)(e) of the SGX Listing Manual) Potential liability implications Possible for the Board s statement to result in liability risks under Singapore law Especially under Section 199 of the Securities and Futures Act, which prohibits the making of a statement that is false or misleading in a material particular Could potentially enable investors to hold the Board accountable for its failure to adequately manage sustainability risks 23

24 SUSTAINABILITY REPORTING Some observations on the practice of SGX-listed issuers SGX-listed issuers are still adapting to the new sustainability reporting requirements Cost concerns, especially for smaller companies But conscious investment in sustainability efforts could provide long-run benefits Operational efficiencies Enhanced reputation Ultimately, the impact of sustainability reporting here remains to be seen as it is relatively new Common topics / issues Corporate governance Environment (e.g. energy and water consumption, carbon footprint) Social / employment practices 24

25 SUSTAINABILITY REPORTING Key considerations for Boards on sustainability reporting ESG factors should be considered as part of Board s annual strategy review Identify emerging ESG factors or trends Consider how best to allocate resources in managing the most critical ESG risks Importance of calibrating the level of constructive disclosure Balancing between transparency vs. avoiding immaterial or duplicative disclosures 25

26 DUAL CLASS SHARES 26

27 SGX S INTRODUCTION OF DUAL CLASS SHARES SGX s introduction of dual class shares On 26 Jun 2018, SGX introduced rules on the listing of issuers with dual class share ( DCS ) structures Allows certain shareholders voting rights disproportionate to their shareholding The new rules take immediate effect Rationale Maintain Singapore s competitiveness and attractiveness as a financial hub Draw high-technology companies and family businesses In line with Singapore s strategy to strengthen its innovation ecosystem and enterprise capabilities 27

28 STRATEGIES TO ATTRACT MORE IPOS SGX s recent introduction of dual class shares Must show suitability for DCS listing Non-exhaustive factors: Business model Track record Role and contribution of multiple-vote shareholders Participation by sophisticated investors Other features that require DCS structure (e.g. innovative company, family business) 28

29 SAFEGUARDS TO ADDRESS RISKS Addressing Entrenchment Risks Maximum voting differential of 10:1 for multi-vote shares Minimum 10% voting rights to be held by one-vote shareholders Addressing Expropriation Risks Enhanced voting process For constitutional amendments, variation of class rights, winding-up, etc. Sunset clause with events stipulated at IPO Independent directors Majority of AC, NC, RC 29

30 COMPARISON WITH HKEX SGX & HKEx DCS regimes On the heels of Hong Kong s launch of its DCS regime, which has attracted multi-billion dollar IPOs E.g. Xiaomi s DCS IPO in June 2018; Meituan Dianping has filed for DCS IPO SGX vs. HKEx SGX Rules HKEx Rules Applicant must be suitable for listing with DCS structure Note: SGX rules are silent as to nature of the applicant more flexibility in determining suitability of applicant Applicant expected to demonstrate: Necessary characteristics of innovation and growth Suitable for listing with a weighted voting rights structure Food for thought: Does SGX s DCS regime strike an appropriate balance between promoting IPOs and mitigating expropriation and entrenchment risks? 30

31 US EXPERIENCE WITH DCS LISTINGS US experience with DCS Nasdaq and NYSE have actively solicited and listed issuers with DCS In the US, almost 30% of IPO companies have 2 classes of common stock and unequal voting rights (Davis Polk Survey, 11 July 2018) In March 2017, Snap s IPO was the first in which only non-voting shares were offered to the public Controversy when global index providers announced that they will partially or fully exclude companies with DCS from their indices E.g. Certain S&P Down Jones Indices, FTSE Russell indices Role of index providers in shaping governance standards Cf Would index exclusion for DCS companies deprive retail investors of investment exposure to some of the most innovative US companies? 31

32 SHAREHOLDER ACTIVISM 32

33 SHAREHOLDER ACTIVISM Increasing shareholder activism in Singapore and other jurisdictions in recent years Controversial process by which shareholders exert their influence by generating pressure on management Spearheaded primarily by two kinds of investors in the past 10 years: Investors whose motives are purely profit driven Investors whose motives are to improve corporate social responsibility 33

34 SHAREHOLDER ACTIVISM Role of proxy advisory firms in corporate governance A proxy advisory firm provides advice to institutional and other investors on how to vote their shares / units at general meetings E.g. Institutional Shareholder Services, Inc., which has in the past recommended institutional investors of SGX-listed issuers against voting in favour of certain types of resolutions E.g. Resolution for share/unit buyback mandate of an issuer Institutional investor may, as a matter of internal policy, follow the recommendation of the proxy advisory firm 34

35 SHAREHOLDER ACTIVISM Sabana REIT case study (2017) Unitholders were unhappy with non-yield accretive acquisitions and significant discount to rights issue price 66 unitholders of Sabana REIT (holding 0.6% of total units in issue) requisitioned an EGM to, among others, replace the REIT Manager with an internalised manager Activist pressure led the REIT Manager to carry out a strategic review to improve the REIT s performance Impact of social media and online platforms E.g. Facebook, ShareJunction, Hardwarezone Forum 35

36 SHIFT TOWARDS STAKEHOLDER MODEL Overall trend towards the stakeholder-centric model of corporate governance in Singapore and other countries BlackRock s Annual Letter to CEOs (2018): The time has come for a new model of shareholder engagement one that strengthens and deepens communication between shareholders and the companies that they own. Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Mr Larry Fink (BlackRock s Founder, Chairman and CEO) Importance of investor relations To properly articulate long-term business strategies to shareholders/unitholders, customers, suppliers, regulators and other stakeholders 36

37 SHIFT TOWARDS STAKEHOLDER MODEL UK & Singapore: Shareholder primacy vs. Stakeholder interests The UK framework is traditionally based on shareholder primacy Signs of a shift towards stakeholder model Section 172 of the UK Companies Act 2006 requires directors to consider the interests of certain stakeholders: A director must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to (b) (c) (d) (f) the interests of the company s employees, the need to foster the company s business relationships with suppliers, customers and others, the impact of a company s operations on the community and the environment, the need to act fairly as between members of the company. 37

38 SHIFT TOWARDS STAKEHOLDER MODEL UK & Singapore: Shareholder primacy vs. Stakeholder interests Cf Director s duty to act in the best interests of the company under Singapore law Section 159 of the Singapore Companies Act does contemplate that directors can consider the interests of its employees and members Unlike Section 172 of the UK Companies Act 2006, Section 159 of the Singapore Companies Act is permissive, rather than prescriptive 159. The matters to which the directors of a company are entitled to have regard in exercising their powers shall include (a) the interests of the company s employees generally, as well as the interests of its members 38

39 SHIFT TOWARDS STAKEHOLDER MODEL UK experience: 2018 Corporate Governance Code On 16 July 2018, the revised UK Code was issued The slight shift towards the stakeholder model has been highlighted in the 2018 UK Code The shareholders role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. This remains true today, but the environment in which companies, their shareholders and wider stakeholders operate continues to develop rapidly To succeed in the long-term, directors and the companies they lead need to build and maintain successful relationships with a wide range of stakeholders. Concept of purpose forms the guiding principle of the 2018 UK Code The board should establish the company s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture. 39

40 SHIFT TOWARDS STAKEHOLDER MODEL UK experience: 2018 Corporate Governance Code Emphasis on employees as stakeholders 2018 UK Code requires the Board to promote greater engagement with the workforce using one, or a combination of the following: Director appointed from the workforce Formal workforce advisory panel Designated non-executive director Alternative engagement mechanisms which the Board considers effective 40

41 CORPORATE GOVERNANCE & M&A 41

42 CORPORATE GOVERNANCE & M&A M&A as a mechanism for promoting corporate governance Hostile takeover as a mechanism for aligning managers interests with shareholders interests The risk of a hostile takeover poses an external threat which could incentivise good governance Mitigates agency costs which arise from the separation between ownership and control in a company Poor corporate governance Reduces the share price of the company Could result in the company becoming a ripe takeover target 42

43 SHAREHOLDER PRIMACY VS. MANAGERIAL AUTONOMY Degree of shareholder primacy in takeover regulation Takeover regime should maximise shareholders interests and minimise agency costs Favours weak defences against takeovers E.g. UK Shareholder Primacy Managerial Autonomy Management has more autonomy to consider interests of other stakeholders and pursue long-term value Favours strong defences against takeovers E.g. US Food for thought: To what extent should shareholder primacy prevail under the Singapore takeover regime? 43

44 SHAREHOLDER PRIMACY VS. MANAGERIAL AUTONOMY Defensive measures against takeovers Examples of defensive measures: Poison pill (shareholder rights plans) Crown jewel defence (substantial disposals) Golden handshakes (payments to key personnel for loss of office) Payment of special dividends Non-frustration rule has developed in some takeover regimes to limit the extent to which management can hinder a takeover E.g. General Principle 7 of the Singapore Code on Take-overs and Mergers ( Takeover Code ) Draws a distinction between pre-bid vs. post-bid steps 7 Frustration of an offer by offeree board If the board of an offeree company has received a bona fide offer or has reason to believe that a bona fide offer is imminent, it must not, without the approval of its shareholders in general meeting, take any action on the affairs of the offeree company that could effectively result in any bona fide offer being frustrated or the shareholders being denied an opportunity to decide on its merits. 44

45 SHAREHOLDER PRIMACY VS. MANAGERIAL AUTONOMY Defensive measures against takeovers Examples of defensive measures prohibited under Rule 5 of the Takeover Code: Such actions include but are not limited to:- (a) issue any authorised but unissued shares; (b) issue or grant options in respect of any unissued shares; (c) create or issue or permit the creation or issue of any securities carrying rights of conversion into or subscription for shares of the company; (d) sell, dispose of or acquire or agree to sell, dispose of or acquire assets of material amount; (e) enter into contracts, including service contracts, otherwise than in the ordinary course of business Cf Counter-argument in favour of managerial autonomy that Boards and management should be given sufficient space in which to formulate and implement a long-term strategy 45

46 SHAREHOLDER PRIMACY VS. MANAGERIAL AUTONOMY Poison pill defence Operates by substantially increasing the cost of acquisition Board of directors adopts a shareholder rights plan, which is triggered once the bidder acquires the target shares beyond a specified percentage threshold Rights or warrants are then distributed to shareholders other than the bidder, allowing them to purchase shares in the target at a discount results in massive dilution of the bidder s shareholding in the target 46

47 SHAREHOLDER PRIMACY VS. MANAGERIAL AUTONOMY Poison pill defence United States Shareholder rights plans recognised as a valid instrument of takeover defence in Moran v Household International, Inc. (Delaware Supreme Court, 1985) Cf Shareholder rights plans are difficult to implement in Singapore Section 161 of the Companies Act requires directors to obtain shareholders approval in relation to any issuance of shares At common law, directors must also ensure they are acting in the interests of the company in issuing the shares Some have argued that poison pills may be detrimental to shareholders interests as they entrench incumbent management 47

48 Q&A 48