p.w.c.__corporate governance - a guide for company directors

C O R P O R AT E G OV E R N A N C E

A Guide For Singapore Company Directors

PricewaterhouseCoopers(www.pwcglobal.com) is the world’slargest professional services organisation.Drawing on the knowledge and skillsof more than 150,000 people in150 countries, we help our clientssolve complex business problems, andmeasurably enhance their ability tobuild value, manage risk and improveperformance in an Internet-enabled world.PricewaterhouseCoopers refers to themember firms of the worldwidePricewaterhouseCoopers organisation.

COPYRIGHT 2002PRICEWATERHOUSECOOPERSSINGAPORE.ALL RIGHTS RESERVED.

FOREWORD

In the management and running of a company, and in the conduct of directors and management, theterm ‘corporate governance’ is often mentioned. What exactly does corporate governance mean andhow is it relevant to directors?

This guide aims to provide answers to these and other corporate governance related questions. As acomprehensive discussion of corporate governance best practices, with reference to the principles andguidance notes of the Singapore Code of Corporate Governance where relevant, it is intended to serveas a practical guide for all directors of Singapore companies, and in particular, directors of Singaporelisted companies.

This is especially important in present times, where it is clear that companies are increasingly recognisingthat good practices and greater transparency are rewarded by the market place. The focus is on shareholdervalue, and how shareholder value can be effectively enhanced through improved corporate governancepractices, particularly in the area of disclosure and transparency. At the same time, this is particularlyrelevant in view of the Singapore Government’s push to create a regulatory framework that strengthensour capital markets, including rules impacting corporate reporting.

Directors, whilst being primarily concerned with legal governance, need to look toward and embracethe broader aspects of corporate governance, to better fulfill their duties to the company and itsshareholders. This is especially so when the company is of such size that certain duties and responsibilitiesare necessarily delegated to other officers who may not be as directly accountable for their actions asthe company directors are. There have been several instances where company fortunes have turnedsouthwards dramatically, to the surprise of not only the shareholders but also the directors charged withmanaging the company.

This guide is part of a series of PricewaterhouseCoopers publications on corporate governance anddirectors’ duties. PricewaterhouseCoopers has helped many of our clients put in place the necessarysystems in the implementation of the Code. We encourage you to consult us if you need any assistancein this area, or if you have any questions regarding the comments and recommendations set out in thispublication.

PricewaterhouseCoopersJune 2002

Corporate Governance ~ A Guide For Singapore Company Directors

Part 1 Introduction 5Nature of Corporate Governance 6Related Developments 6

Part 2 Corporate Governance Practices 7Overview 7Board Processes 8Board - Role, Composition 8

Role of the BoardSize and Composition of the BoardExecutive versus Non-Executive: Independence from ManagementCharacteristics of Independent DirectorsSelection and Appointment of DirectorsNominating Committee

Board - Conduct, Review of Performance 15Mechanisms for Providing Leadership and Management InteractionFrequency and Conduct of MeetingsReview of Board PerformanceDelegating Board Functions to CommitteesDirectors’ Access to Independent Professional AdviceRestrictions on Director’s Security Dealings and other TransactionsApproach to Significant Business Risks

Board - Remuneration Matters 22Remuneration CommitteeLevel, Mix and Disclosure of Remuneration

Disclosure and Transparency 24Communication with StakeholdersEstablishment of Systems and DisclosureSignificant Non-Financial Disclosures

Auditing and Compliance 28Audit Committee

Membership of the Audit CommitteeRoles and Responsibilities of the Audit CommitteeAudit Committee Meetings and Agenda

Internal ControlInternal AuditExternal AuditAccountability to Shareholders 36

Reporting to ShareholdersMeetings with Shareholders

Part 3 Corporate Ethics 39

Part 4 Appendices 40Appendix 1 - Key Sources of Information: 40Appendix 2 - Corporate Governance Disclosure Summary 41Appendix 3 - Code of Corporate Governance with PwC Annotations 43Appendix 4 - Past Corporate Governance Initiatives and Future Outlook 56Appendix 5 - SID Directors’ Code of Conduct 58

About PwC Singapore 62

T A B L E O F C O N T E N T S

04


Foreword

Corporate governance has emerged as one of the cornerstones of a well functioning economy.In Singapore, the Ministry of Finance, together with the Monetary Authority of Singapore and theAttorney-General’s Chambers, spearheaded a comprehensive review of corporate regulation andgovernance, particularly those affecting listed companies. As part of this exercise, it appointed threeprivate sector-led review committees, one of which examined and reported on practices in corporategovernance, so as to make the necessary recommendations. This review committee, the CorporateGovernance Committee (CGC), completed its work and submitted its report and accompanyingCode to the Singapore Government on 21 March 2001. The Government announced on 4 April 2001its acceptance of all the CGC’s recommendations. A brief summary of past corporate governanceinitiatives undertaken in Singapore is set out in Appendix 4.

As highlighted in the CGC Report, “good corporate governance matters, especially in situations wherethere may be significant conflicts of interests between shareholders and management, such as in certaincorporate acquisitions; management buyouts; financial reporting; performance appraisal, hiring andreplacement of senior management; and executive compensation. Investors, especially internationalinstitutional investors, increasingly demand high corporate governance standards in companies thatthey invest in” (CGC Report, para. 3).

In their deliberations as to which regulatory approach to adopt so as to promote good corporategovernance, the Committee considered factors, including the disclosure-based philosophy thatSingapore is moving towards. As a result of these considerations, ”the balanced approach adoptedin markets such as the UK and Canada provide the best approach for improving corporate governancein Singapore” (CGC Report, para 13).

Accordingly, and in line with the CGC recommendations, Rule 710(2) of the Singapore Exchange (SGX)Securities Trading Limited Listing Manual (SGX-ST Listing Manual) requires all listed companies todisclose their corporate governance practices and give explanations for deviations from the Code intheir annual reports for annual general meetings held from 1 January 2003 onwards. Listed companieswhich do not wish to adopt the Code early are required to continue to comply with the previouslyissued Best Practices Guide, which will be deleted from 1 January 2003.

With this approach, the Code does not strive “to be a panacea. It, however, recognises the need tobalance enterprise and accountability in creating long-term shareholder value. It allows companiesflexibility in choosing its approach to corporate governance, subject to appropriate disclosure to, andapproval by, shareholders... Each company must decide which governance practices are relevant toinvestor decision-making and make disclosure accordingly. The market will judge each approach as itsees fit” (CGC Report, para 7).

PART 1INTRODUCTION

5Introduction


NATURE OF CORPORATE GOVERNANCE

The term corporate governance, although commonly used, has no standard definition. It encompasses awide range of items and activities, and holds different meanings for different user groups.

In the CGC Report, corporate governance “refers to the processes and structure by which the businessand affairs of the company are directed and managed, in order to enhance long-term shareholder valuethrough enhancing corporate performance and accountability, whilst taking into account the interestsof other stakeholders” (Report, para. 1).

RELATED DEVELOPMENTS

In addition to the CGC, a second private sector-led Disclosure and Accounting Standards Committee(DASC) was set up, one of its prime objectives being to review the approach, development and promotionof best practices in disclosure requirements amongst public listed companies in Singapore. In theirdeliberations and final recommendations, this committee highlighted the need to address the issueof auditor independence, given the auditors’ role in audit quality and its implications on effectivecorporate governance.

Following these recommendations, the Singapore Public Accountants Board (PAB) issued on 1 April 2002a consultation paper, proposing new rules on auditor independence. In addition to discussing theprinciples impacting auditor’s independence, the paper makes recommendations in the areas of theeconomic interests and relationships, the provision of non-audit services, and other matters such asfees and gifts. While it is uncertain at present what the final rules will be, it may be expected that therole of Audit Committees as discussed in pages 29 to 31 of this guide may need to take into accountthese final rules when assessing auditor independence.

6 Nature of Corporate Governance


OVERVIEW

The Code as issued by the CGC is divided into four main sections: Board Matters, RemunerationMatters, Accountability and Audit, and Communication with Shareholders. As specified in para. 18of the CGC Report, the “objective of the Code is not to prescribe corporate behaviour in detail butto essentially secure sufficient disclosure so that investors and others can assess a company’sperformance and governance practices and respond in an informed way”.

As Part 2 is intended to discuss corporate governance practices in a comprehensive manner,we have classified these practices into four categories:

• Board processes

• Disclosure and transparency

• Auditing and compliance• Accountability to shareholders

Board processes relate to the mode by which the board of directors should be established, their rolesand responsibilities, and board policies and procedures. These encompass “Board Matters” and“Remuneration Matters” as set out in the Code.

In addition to sound Board Processes, good corporate governance practices deal with the extent andquality of Disclosures and Transparency in a company’s affairs and its conduct. Fundamentally, thisrelates to effective and comprehensive communication between the company, its shareholders andstakeholders within the community. To some extent, this includes principles set out in the section“Communication with Shareholders” of the Code.

Corporate governance practices include the Auditing and Compliance aspects of the company’sactivities, that is, those mechanisms that safeguard the company’s assets and resources.

Lastly, corporate governance practices encompass full and proper Accountability to all Shareholders,ensuring that fair treatment is accorded to all investors, regardless of the size of their investment orinfluence. These latter two categories include principles discussed in the section “Accountability andAudit” of the Code.

Cross-references to the principles and guidance notes of the Code and/or the Singapore Exchange(SGX) Securities Trading Limited Listing Manual (SGX-ST Listing Manual) Best Practice Guide havebeen included where relevant. See Appendix 3 for the Code with PwC references.

On the global scene, one of the more established and widely referred to codes on corporategovernance is the United Kingdom’s Combined Code on Corporate Governance published in 1998.The London Stock Exchange Listing Rules require UK-listed companies to disclose how they haveapplied the principles of the Combined Code, and to make a statement as to whether or not theyhave complied with the provisions of the Combined Code throughout the period. Where applicable,we will discuss briefly these principles so that companies are also aware of such best practicestandards set out in the Combined Code.

PART 2 CORPORATE GOVERNANCE PRACTICES

7Overview


BOARD PROCESSES

An effective board of directors (the Board) is critical to good corporate governance practices.The Board should be organised for maximum effectiveness, involved in the development and regularevaluation of the company’s strategic goals, and subsequent review of the company’s achievementof these goals. In addition, there should be regular evaluation of all board members and establishedsuccession-planning processes.

For ease of reference, this category has been further sub-divided into the following sections:

Board - Role, Composition

(a) Role of the Board(b) Size and Composition of the Board(c) Executive versus Non-Executive: Independence from Management(d) Characteristics of Independent Directors(e) Selection and Appointment of Directors(f) Nominating Committee

Board - Conduct, Review of Performance

(a) Mechanisms for Providing Leadership and Management Interaction(b) Frequency and Conduct of Meetings(c) Review of Board Performance(d) Delegating Board Functions to Committees(e) Directors’ Access to Independent Professional Advice(f) Restrictions on Director’s Security Dealings and other Transactions(g) Approach to Significant Business Risks

Board - Remuneration Matters

(a) Remuneration Committee(b) Level, Mix and Disclosure of Remuneration

Board - Role, Composition

(a) Role of the Board

Highlights:

• Every company needs an effective Board.

• The Board is required to assume stewardship responsibility, including leading and control, monitoringmanagerial performance, and optimising shareholder value.

Role of the Board8


“Every company should be headed by an effective Board to lead and control the company”(Code, principle 1) so as to enable the company, its shareholders and other stakeholders to achievetheir respective objectives. Some of the common objectives of a company include the efficientconduct of the company’s principal activities, enhancing shareholder value and the satisfactoryfulfilment of social responsibilities.

In their Report, the CGC states that “other than charting corporate strategy, the Board of Directors ischiefly responsible for monitoring managerial performance and achieving an adequate return forshareholders, while preventing conflicts of interest and balancing competing demands on thecorporation. Most governance guidelines and codes of best practice assert that the Board shouldexplicitly assume responsibility for the stewardship of the corporation and emphasise that boardresponsibilities are distinct from management responsibilities” (CGC Report, para. 22). In the Code,this point is further reinforced in principle 10 which states that the “Board is accountable to shareholderswhile the Management is accountable to the Board”.

The Board’s stewardship responsibility for the company includes the following:

reviewing and approving corporate strategies, budgets and financial plans;

overseeing and monitoring organisational performance and the achievement of the company’sstrategic goals and objectives;

monitoring financial performance including approval of the annual and interim financial reports;ensuring the significant risks facing the company and its controlled entities have been identifiedand appropriate, and adequate control, monitoring and reporting mechanisms are in place;

reporting to shareholders and establishing a communications policy, such as an investorrelations programme and shareholder communication policy;

reviewing the integrity and adequacy of the company’s internal controls and managementinformation systems as well as ensuring compliance with laws, regulations, directives,guidelines and the company’s internal code of conduct;

providing succession planning, including appointing, training, and mentoring senior management,as well as determining and reviewing compensation levels.

(b) Size and Composition of the Board

Highlights:

• There is no ideal magic number.

• Size and composition depends on the needs of the company and the individual and relativeexperience of each director and the Board as a whole.

• All Boards should be headed by a chairman, who is distinct and separate from the CEO.• A strong independent element within the Board is very important.

• The Board should regularly review and assess its composition, skills, qualities and experiences.

9Size and Composition of the Board


It is difficult and impractical to specify the ideal number of members for any board of directors.The number of directors required depends on the needs of the company, the directors’ individual andrelative experience as well as his/her contribution to the Board. A key guideline in determining thesize of the Board would be that number of directors which facilitates effective decision-making.The Code recommends that the Board examine its size and, with a view to determining the impact ofthe number upon effectiveness, decide on what it considers an appropriate size for the Board whichfacilitates effective decision making, after taking into consideration the scope and nature of theoperations of the company (Code, guidance note 2.3). In a survey of Singapore companies jointly conductedby the Singapore Institute of Directors and Egon Zehnder International (September 2000), the typicaltotal size of the Board ranges from four to 14 members. Further, the size of the Board is typically higherfor those companies with a turnover of more than S$100 million, averaging about eight directors.

On an annual basis, the Board should identify the mix of skills, qualities and experiences it requiresso that it can function competently and efficiently. As a guide, the Board should comprise directorswho as a group provide core competencies such as accounting or finance, business or managementexperience, industry knowledge, strategic planning experience and customer-based experience orknowledge (Code, guidance note 2.4).

Regardless of the size of the Board, all boards are generally headed by a chairman who is responsiblefor running the Board, and supported by a chief executive officer (CEO) who has primary responsibilityof running the company’s business. The Code recommends that there “should be a clear division ofresponsibilities at the top of the company - the working of the Board and the executive responsibilityof the company’s business - which will ensure a balance of power and authority, such that no oneindividual represents a considerable concentration of power” (Code, principle 3). To achieve this, theroles of the chairman and the CEO should in principle be separate, to ensure an appropriate balanceof power, increased accountability and greater capacity of the Board for independent decision making,and where the chairman and CEO are related to each other, such relationships should be disclosed(Code, guidance note 3.1). As a best practice, it is also recommended by the Combined Code that acompany that has decided to combine the roles of the chairman and the chief executive officer in oneindividual publicly explain its rationale for doing so (Combined Code, Part 2, Section 1, A.2.1).

Regardless of how a company decides to structure its Board, there “should be a strong and independentelement on the Board, which is able to exercise objective judgement on corporate affairs independently,in particular, from management. No individual or small group of individuals should be allowed todominate the Board’s decision making” (Code, principle 2). To achieve this strong and independentelement, it is recommended in the local Code that independent directors make up at least one-third ofthe Board (Code, guidance note 2.1). An alternative recommendation by the Combined Code suggeststhat ideally, there should be a recognised senior member other than the chairman to whom concernscan be conveyed (Combined Code, Part 2, Section 1, A.2.1). It is indeed preferable that the Board beconstituted with a majority of non-executive members of the right calibre and credibility, so that theirviews may carry significant influence in the Board’s decisions. A Board comprising a majority of suchnon-executive directors will have more power to implement board decisions, including those whichmay at times be contrary to the wishes of management or a major shareholder, should the need arise.In addition to creating a more desirable board culture, this also imposes a greater responsibility on theindependent majority to be especially diligent in carrying out their duties, and when making board decisions.

The Board’s procedures should therefore include the periodic review of the background and relationshipsof each director so that the independence of each non-executive director can be properly determinedaccording to his/her individual circumstance (refer to pg 11 Executive vs Non-Executive: Independencefrom Management).

10 Size and Composition of the Board


At this juncture, it is important to point out that while the terms “non-executive” and “independent”directors are often used interchangeably, there is a clear distinction between these terms. A non-executive director need not necessarily be independent. An independent director is one who is freefrom any business or other relationship which could, or could reasonably be perceived to, materiallyinterfere with the exercise of independent judgement and the ability to act with a view to the bestinterests of the company. See pg 12, Characteristics of Independent Directors for more details on theattributes of independent directors.

(c) Executive versus Non-Executive: Independence from Management

Highlights:

• The role of executive and non-executive directors, though different, are equally important.

• All directors share equal legal responsibility regardless of their appointed role.

All directors, whether they are full-time executives or non-executives, share in the leadership andcontrol of the company. They also share the same legal responsibilities, including the responsibilityfor the company’s financial reporting to its shareholders and other stakeholders.

Executive directors are involved in the day-to-day operations of the company. While they may contributesignificantly to the execution of the Board’s responsibilities, their executive involvement could beperceived to impair their overall independence on judgmental issues and decisions to be undertakenby the company as they both manage and direct the company.

Directors who do not hold any salaried appointment with the company but who may receive fees laiddown in the articles (or as determined by the shareholders in the general meeting) are commonlyreferred to as “non-executive directors”. For effective stewardship, the majority of the Board shouldcomprise such non-executive directors. The main function of a non-executive director is to determinethe overall policies of a company and contribute in the decision-making of the Board. Non-executivedirectors bring an independent judgement to bear on issues of strategy, performance and resources,including key appointments and standards of conduct.

Non-executive directors are therefore important elements in an effective board. They are not in aposition to manage the company, but can only direct the company’s management. Although managementis normally in the best position to exercise business judgement in the company’s affairs, non-executivedirectors can provide an objective and dispassionate view when this is needed. This monitoring role isespecially important in respect of the company’s financial management. This role is traditionally recognisedthrough the formation of the audit committee (refer to pg 28, Audit Committee).

It is strongly recommended that non-executive directors be of the right calibre and credibility, andpossess the required mindset, skills and experience. Although some non-executive directors mayreceive fees or have interests and relationships with the company arising from holding shares, themajority of non-executive directors should be independent of the management of the business of thecompany, for as discussed previously, a non-executive director need not necessarily be independent.

Nominee and alternate directors should note that their primary obligation is to act in the best interestsof the company. Their duty to their principal is always subject to this duty to act in the company’sbest interests.

11Executive versus Non-Executive : Independence from Management


(d) Characteristics of Independent Directors

Highlights:

• The determination of independence is highly judgemental.

• An independent director should be independent in substance rather than form.

The Code defines an independent director as “one who has no relationship with the company, itsrelated companies (including its subsidiaries, fellow subsidiaries or parent company) or its officers thatcould interfere, or be reasonably perceived to interfere, with the exercise of the director’s independentbusiness judgement with a view to the best interests of the company” (Code, guidance note 2.1).

An independent director is likely to be one who:

is not a member of management (non-executive);

has not within the last three years been employed in an executive capacity by the company oranother group company or been a director of the company after ceasing to hold any such employment;

is not an immediate family member of the executive director and/or any member of themanagement team;

is not a substantial shareholder of the company or an officer of or otherwise associated directly orindirectly with a substantial shareholder of the company;is not a principal of a professional adviser to the company or another group company;

is not a significant supplier or customer of the company or another group company, nor an officer of,or associated directly or indirectly with a significant supplier or customer;

does not have a significant contractual relationship with the company or another group companyother than as a director of the company; and

is free from any interest and any business or other relationship which could, or could reasonably beperceived to, materially interfere with the director’s ability to act in the best interests of the company.

The Code provides four non-exhaustive example situations which would deem a director not to beindependent (Code, guidance note 2.1). These are:

a director being employed by the company or any of its related companies for the current or any ofthe past three financial years;

a director who has an immediate family member (defined in the SGX-ST Listing Manual to meanthe spouse, child, adopted child, step-child, sibling and parent) who is, or has been in any of thepast three financial years, employed by the company or any of its related companies as a seniorexecutive officer whose remuneration is determined by the remuneration committee;

a director accepting any compensation from the company or any of the its related companies otherthan compensation for board service for the current or immediate past financial year; or

a director being a substantial shareholder of or a partner in (with 5 percent or more stake), or anexecutive officer of, any for-profit business organisation to which the company made, or from whichthe company received, significant payments in the current or immediate past financial year. As aguide, payments (excluding payments for such transactions which involve standard services withpublished rates or routine and retail transactions and relationships) aggregated over any financialyear in excess of S$200,000 should generally be deemed significant.

Characteristics of Independent Directors12


The Code provides for flexibility and the exercise of judgement on the part of the Board, for if “acompany wishes, in spite of the existence of one or more of these relationships, to consider the directoras independent, it should disclose in full the nature of the director’s relationship and bear responsibilityfor explaining why he should be considered independent” (Code, guidance note 2.2).

(e) Selection and Appointment of Directors

Highlights:

• There should be a formal and transparent process for new appointments.• All directors should submit themselves for re-election at regular intervals.

• Service contracts may be one way of retaining and motivating executive directors.

For a Board to be continually effective, the Code recommends that there “should be a formal andtransparent process for the appointment of new directors to the Board. As a principle of good corporategovernance, all directors should be required to submit themselves for re-nomination and re-electionat regular intervals” (Code, principle 4). As a principle of good corporate governance, the Code statesin guidance note 4.2 that this should be at least once every three years. All re-appointments shouldnot be automatic. To achieve this, the Code states in guidance note 4.1 that companies should establisha Nominating Committee to make recommendations to the Board on all board appointments (refer alsoto pg 14 Nominating Committee).

Non-executive directors should be selected through the same formal process and the Board shouldevaluate both this process and their appointment. Additionally, the Combined Code also recommendedthat non-executive directors be appointed for specified terms subject to re-election (Combined Code,Part 2, Section 1, A.6.1).

The Code recommends that key information regarding directors, including an indication as to whichdirectors are executive, non-executive or independent, be disclosed in the annual report. Further, thenames of the directors submitted for election or re-election should be accompanied by such detailsand information to enable shareholders to make informed decisions. (See Code, guidance note 4.5).

Although there may be practical difficulties in attracting and retaining high-calibre independentnon-executive directors, this should remain a goal which companies should try to achieve.

The company could consider entering into service contracts with the directors, and in particular, theexecutive directors. This is to protect both its interests in the individual and his/her contribution tothe company while safeguarding the company by ensuring that the individual is not complacent inhis/her performance. These contracts should have a fixed appointment period and not be excessivelylong or with onerous removal clauses (Code, guidance note 8.4). In practice, such contracts shouldnot exceed three years, unless approved by shareholders. It should be noted that when such servicecontracts are tabled for voting, the director in question who is also a shareholder in the companyshould abstain from voting on this issue.

13Selection and Appointment of Directors


(f) Nominating Committee

Highlights:

• Nominating committees should comprise at least three directors, a majority of whom shouldbe independent.

• One of its key responsibilities is evaluating the performance of the Board and each individual director.

This committee “should comprise at least three directors, a majority of whom, including the chairman,should be independent. The nominating committee should have written terms of reference that describesthe responsibilities of its members, and its membership is disclosed annually” (Code, guidance note 4.1).

The responsibilities of the nominating committee, as set out under the Code, include the following:

re-nominating any director, having regard to the director’s contribution and performance(e.g. attendance, preparedness, participation and candour) including, if applicable, as anindependent director (Code, guidance note 4.2);determining on an annual basis whether or not a director is independent, bearing in mindthe circumstances as discussed on pg 12 Characteristics of Independent Directors andother salient factors (Code, guidance note 4.3);

deciding whether or not a director is able to and has been adequately carrying out his/her dutiesas a director of the company, particularly when a director has multiple board representations(Code, guidance note 4.4);

deciding how the Board’s performance may be evaluated and proposing objective performancecriteria (Code, guidance note 5.1) - see pg 15 Review of Board Performance; and

assessing the effectiveness of the Board as a whole and assessing the contribution by each individualdirector to the effectiveness of the Board (Code, guidance note 5.3).

In addition to the above responsibilities, the nominating committee should identify gaps in the mix ofskills, experience and other qualities required in an effective board so as to better nominate or recommendsuitable candidate(s) to fill these gaps. Further, this committee may assess the effectiveness of thecontributions made by the various committees of the Board and advise the Board on the company’sgeneral policies on the appointment of non-executive directors.

The company, through the nominating committee, should also provide an orientation and educationprogramme for new recruits to the Board as an integral element of the process of appointing new directors.

Nominating Committee14


Board - Conduct, Review of Performance

(a) Mechanisms for Providing Leadership and Management Interaction

Highlights:

• The Board should formalise and share with management a list of those matters which requireBoard decision.

• Management should provide board members with comprehensive information, on a timely basis.

• Board members should have separate and independent access to management.

• The skills of every director should be regularly upgraded.

To effectively execute its responsibilities, the recommendation of the Code is that companies “shouldadopt internal guidelines setting forth matters that require board approval, and specify in theircorporate governance disclosures the type of material transactions that require board approval undersuch guidelines” (Code, guidance note 1.2). In the Combined Code, it is recommended that theBoard has a formal list of those matters which can only be specifically decided upon by the Board(Combined Code, Part 2, Section 1, A.1.2). Such internal guidelines ensure that the direction andcontrol of the company is firmly in their hands and acts as a safeguard against misjudgements andpossible illegal practices. This will also help safeguard the company against impaired judgements andpossible illegal practices by management. Management should be aware of the types of matters thatrequire board decision and highlight these matters for their attention, as and when appropriate.

In order for the Board to fulfil their responsibilities, the Code recommends that “board membersshould be provided with complete, adequate and timely information prior to board meetings and onan on-going basis” (Code, principle 6). “Information provided should include background or explana-tory information relating to matters to be brought before the Board, copies of disclosure documents,budgets, forecasts and monthly internal financial statements. In respect of budgets, any materialvariance between the projections and actual results should also be disclosed and explained”(Code, guidance note 6.2). In addition, management “should provide all members of the Board witha balanced and understandable management accounts of the company’s performance, position andprospects on a monthly basis” (Code, guidance note 10.2).

The company should endeavour to establish procedures which ensures that the Board is indeedpromptly supplied with such requisite information, for “management has an obligation to supply theBoard with complete, adequate information in a timely manner. Reliance purely on what is volunteeredby management is unlikely to be enough in all circumstances and further enquiries may be required ifthe particular director is to fulfil his or her duties properly. Hence, the Board should have separate andindependent access to the company’s senior management” (Code, guidance note 6.1). Where necessary,management staff could be invited to board meetings to make relevant presentations to the board membersor to receive and assist in the implementation of certain decisions made by the Board. In the dischargeof their duties, board members should also have the right to inspect and copy all books, records anddocuments, and inspect the physical properties and assets of the company, subject to reasonable limits.

To further enhance the skills of directors, it should be the responsibility of the Board to ensure thatevery director receives “appropriate training” (including his or her duties as a director and how todischarge those duties) when he is first appointed to the Board. This should include an orientation-

15Mechanisms for Providing Leadership and Management Interaction


training programme to ensure that incoming directors are familiar with the company’s business andgovernance practices. It is equally important that directors should receive further relevant training,particularly on relevant new laws, regulations and changing commercial risks, from time to time”(Code, guidance note 1.3).

(b) Frequency and Conduct of Meetings

Highlights:

• The frequency of meetings is subject to the needs of the company, so as to enable the Board to retainfull and effective control.

• Attendance by all directors is greatly encouraged. The company secretary should attend all meetings.

• The chairman is primarily responsible for scheduling the meetings, preparing the agenda, andcoordinating the flow of information between management and the Board.

• Meeting procedures should be clearly documented and complied with.

As with the size of the Board, the frequency of board meetings is subjective and dependent on theneeds of the company. The Code (guidance note 1.1) suggests that the Board meet regularly and aswarranted by particular circumstances, as deemed appropriate by the board members. At a minimum,the Board should meet with sufficient regularity so as to enable it to retain full and effective controlover the company and monitor the performance of the executive management.

Attendance by all directors at these meetings is highly encouraged, and to facilitate this, the Codeencourages companies to amend their Articles of Association to provide for telephonic and videoconference meetings.

In addition to the regular schedule of meetings, any director, or the company secretary at the request ofany director, may convene a board meeting. The chairman of the Board usually leads and directs thematters to be discussed at all board meetings. There may be times where directors present at a boardmeeting choose one of their number to be the chairman of the meeting.

In order for the Board to make informed decisions, adequate information should be provided accurately,promptly and in advance of the board meetings (refer Code, principle 6). Thus, the implicit role of thechairman in respect of board proceedings include the following:

schedule meetings that enable the Board to perform its duties responsibly while not interfering withthe flow of the company’s operations;

prepare the meeting agenda in consultation with the CEO;

exercise control over quality, quantity and timeliness of the flow of information between managementand the Board; and

assist in ensuring compliance with the company’s guidelines on corporate governance.

(See Code, guidance notes 3.2 and 3.3)

As there are no legislative requirements specifying the manner in which directors’ meetings are to beconvened or conducted, board meetings are generally more informal than shareholder meetings.Decisions may be decided unanimously without any formal voting.

16 Frequency and Conduct of Meetings


Where necessary, questions arising at any board meeting may, subject to a company’s articles ofassociation, be decided by a majority of votes, with each director allowed a vote each. In cases ofequality of votes, the chairman may be awarded a second or casting vote. Directors and personsconnected to directors interested in a transaction should voluntarily abstain from any discussionsand votings in respect of such transactions.

To avoid dispute or conflict, it is important for the Board to have established meeting procedureswhich are clearly documented and complied with. Further, the company secretary should attend allboard meetings (Code, guidance 6.3) and deliberations and proceedings at board meetings should beminuted by the company secretary and signed by the chairman to confirm the record of such proceedings.

(c) Review of Board Performance

Highlights:

• The nominating committee should ascertain and propose objective performance criteria to beused in the assessment of the performance of the Board and each individual director.

• The performance criteria to be used should be approved by the Board, and should not bechanged frequently.

• The review and assessment should be conducted by the nominating committee at leastonce annually.

Regular reviews and evaluations are key to continual improvements. On a regular basis, there shouldtherefore be a “formal assessment of the effectiveness of the Board as a whole and the contributionby each director to the effectiveness of the Board” (Code, principle 5), as well as a review of theperformance of the company and its management. For this to be effective, the Code suggests inguidance note 5.3 that every Board should implement a process to be carried out by the nominatingcommittee for assessing the effectiveness of the Board as a whole and for assessing the contributionby each individual director to the effectiveness of the Board (refer pg 14, Nominating Committee).

The nominating committee should decide how the Board’s performance may be evaluated, proposeobjective performance criteria (Code, guidance note 5.1) and meet to discuss these issues, at leastonce annually, without the other executive directors or management being present. Other directorsor management may be invited to attend part of the meeting, but the independent directors shouldmake the ultimate assessment on their own.

The proposed “performance criteria, that allow comparison with its industry peers, should beapproved by the Board and address how the Board has enhanced long-term shareholders’ value.These performance criteria should not be changed from year to year, and where circumstances deemit necessary for any of the criteria to be changed, the onus should be on the Board to justify thisdecision” (Code, principle 5.1).

Some of the criteria to use when evaluating the company and management’s performance could includemonitoring the company’s performance against business plans and budgets, long-term return objectives,strategic objectives and the performance of competitors. In addition, “the performance evaluationshould also consider the company’s share price performance over a five-year period vis-a-vis theSingapore Straits Times Index and a benchmark of its industry peers. Other performance criteria thatmay be used include return on assets, return on equity, return on investment, economic value addedand profitability on capital employed” (Code, guidance note 5.2).

17Review of Board Performance


Where the performance criteria have not been met, or were under-achieved, the Board should taketimely steps to identify areas of under-performance and their causes, evaluate possible remedialactions and decide and act on particular remedies.

In conducting this review, the Board should consider whether it has reviewed and updated the company’sstrategic objectives, monitored progress towards these goals and communicated the results both withinthe organisation to management and employees, and, outside the organisation, to shareholders andother interested parties. It should also assess the company with regard to its operating strength, efficiencyand potential to achieve its formulated targets.

As part of this review, the Board should also review those policies where, in the interests of shareholdersand other stakeholders, management discretion should be limited. Examples of such policies wouldinclude legal compliance and environmental policies.

When a director has multiple board representations, he or she must ensure that sufficient time and attentionis given to the affairs of each company. Internal guidelines should be adopted that address the competingtime commitments that are faced when directors serve on multiple boards. (See Code, guidance note 4.4).

(d) Delegating Board Functions to Committees

Highlights:

• For effectiveness, some of the board responsibilities may be delegated to certain board committees.

• Depending on the objectives of each committee, each committee should generally comprise amajority of independent directors who are entitled to obtain the necessary advice and resourcesas they deem necessary.

For the effective execution of its responsibilities, the Board may delegate some of these responsibilitiesto certain board committees. Any committee so formed should conform to the regulations imposed onit by the board of directors.

The composition and resourcing of these committees is fundamental to their effectiveness and will helpensure that they operate on behalf of, and not to bypass, the Board. In formulating and establishingthese committees, the Board should consider the following guidelines:

the committee(s) should generally be constituted with a majority of independent directors;

the committee(s) should be entitled to obtain independent professional advice at the cost of the company(see pg 19 Directors’ Access to Independent Professional Advice); and

the committee(s) should be entitled to obtain such resources and information from the company,including direct access to employees and advisers to the company, as they deem necessary.

The more commonly convened board committees include the following:

a nominating committee (see pg 14 Nominating Committee )

a remuneration committee (see pg 22 Remuneration Committee)

an audit committee (see pg 28 Audit Committee), and

an ethics committee (see Part 3 Corporate Ethics on pg 39 ).

18 Delegating Board Functions to Committees


(e) Directors’ Access to Independent Professional Advice

Highlights:

• For effectiveness, the Board should have established procedures to enable it as a whole, or individualdirectors, to take independent professional advice at the company’s expense.

• Such access to professional advice should extend to the services and advice of the company secretary.

The Code recommends that in the furtherance of the Board’s duties, the Board should have a procedurefor directors, either individually or as a group, to take independent professional advice, if necessary, atthe company’s expense (Code, guidance note 6.4). Such professional advice may be sought from thelikes of the company’s accountant, auditor, and/or legal counsel. Independent directors and boardcommittees should have the right to retain experts to advise them on problems arising from the exerciseof their functions and powers if the directors reasonably believe that the retention of an outside expertis required for the proper performance of their duties.

Additionally, access to professional advice should extend to the advice and services of the companysecretary. It is a recommendation of the Code that all directors have separate and independent accessto the company secretary’s advice and services, as the company secretary’s responsibilities includeensuring that Board procedures are followed, and that applicable rules and regulations are compliedwith (Code, guidance note 6.3). Given the key role that the company secretary plays in the company’scorporate governance framework, the Board should where necessary re-examine the terms of referenceof the company secretary, and ensure that the role of the company secretary is clearly defined. Anydiscussion on the removal of the company secretary should be discussed and decided upon by theBoard as a whole.

(f) Restrictions on Director’s Security Dealings and Other Transactions

Highlights:

• All transactions between board members and the company should be at arm’s length.

• As part of their fiduciary duties, each director has a duty to disclose all material personal interestsin company transactions, as well as other conflicts of interest. Wherever possible, directors shouldstudiously avoid situations of possible conflict between personal and company interests.

• Directors and officers should not misuse company information and trade in the company’ssecurities for personal gain, to the detriment of other shareholders.

All transactions between the company and the board members, as well as their associates, should beconducted at arm’s length and should not run counter to the interests of the company or any groupcompany. The transactions described include transactions with “associate” and “associated companies”as defined in the SGX-ST Listing Manual and “interested persons transactions” as defined in Chapter 9 ofthe SGX-ST Listing Manual. Such transactions should be reviewed by the audit committee and approvedin advance of their execution. Board members should not exploit business opportunities available tothe company or group company for themselves or for the benefit of associated persons or companies.Board members should not request or receive gifts or other advantages for themselves or third partiesif this could jeopardise the interests of the company or its stakeholders. Further, Section 162 of theCompanies Act (Cap. 50) generally prohibits a company from making loans to directors or tocompanies connected to directors.

19Directors’ Access to Independent Professional AdviceRestrictions on Director’s Security Dealings and other Transactions


To ensure that independence is maintained, directors should disclose to their fellow board members,as well as to shareholders in certain instances, material personal interests in transactions of the companyand group companies as well as other conflicts of interests. This duty to disclose forms part of thedirector’s fiduciary duties towards the company, and such disclosures extend beyond those mandatedby the Companies Act concerning certain types of transactions, including interests in contracts withand shares of the company.

One of the key aspects of a director’s fiduciary duties is the duty not to place himself in a position ofpossible conflict between personal and company interests. Thus, a director should not make use ofcompany property, or his position as director, or information acquired by virtue of that position toobtain personal profit. In the event of potential transactions which would give rise to conflicts of interest,the board member in question must disclose this to the company and the chairman should decidewhether the director in question should participate in those meetings related to the said transaction(s).

Directors and officers should not deal in their company’s securities on short-term considerations.They should refrain from frequent transactions and counter transactions which aim to achieve short-term gains. The company should institute measures and define certain closed periods during which thepurchase and sale of securities are prohibited so as to ensure that insider trading does not take place.In particular, directors and officers should not be dealing in their company’s securities during criticalperiods before key announcements, such as announcements of the company’s annual or half-yearresults. In this respect, the Best Practice Guide of the SGX-ST Listing Manual states: “an officer shouldnot deal in his company’s securities during the period commencing one month before the announcementof the company’s annual or half-year results, as the case may be, and ending on the date of announcementof the relevant results”.

The Board should establish an internal compliance code to provide guidance to its officers (definedunder the Securities and Futures Act 2001 to include the company’s directors and employees) withregard to dealing by the officers in the company’s securities. It is an offence under the Securities andFutures Act 2001 for any person (including the listed issuer’s officers) to deal in the company’s securitiesas well as securities of other listed issuers while in possession of unpublished material price-sensitiveinformation in relation to those securities.

The company’s internal compliance code should set out the minimum procedures that directors shouldadopt in conflict of interests situations. It should also embrace and discuss the following potentialconflict of interests situations:

misuse of corporate information, property or position;

the taking of corporate opportunities; and

the engagement of such business which competes with the company.

Notwithstanding any internal code instituted by the company, officers should always bear in mind thatthe law on insider trading is applicable at all times.

20 Restrictions on Director’s Security Dealings and other Transactions


(g) Approach to Significant Business Risks

Highlights:

• An effective Board should regularly review and identify areas of significant business risks, andestablish procedures for managing such risks.

• A chief risk officer may be designated to assume this role.

Whilst this matter is not set out in the Code, as part of good corporate governance practices, aneffective board should have in place an approach to identifying areas of significant business risksand the procedures for managing such risks. For example, in the run-up to the new millennium,the “Year 2000” problem was a potential source of significant business risk. Other current businessrisks that companies face include those technological risks brought about by the surge in e-commercetrading, in particular, risks related to security and authenticity of transactions.

Thus, in line with best practices, it is important for the Board to ensure that they have in placean effective process which:

identifies key risks (operational, external / strategic, regulatory as well as financial);

ensures effective counter-measures are in place to address them;

monitors progress in risk mitigation (i.e. ensures that the counter-measures are working asenvisaged); andregularly updates the Board on new risks and status of existing ones.

Specifically, procedures should be established to require executive directors and/or seniormanagement to comprehensively, regularly and promptly inform the Board of significant issuessuch as the following:

relevant matters regarding significant business development or risk exposure of the companyand major subsidiaries;

changes in business or industry trends or risk exposure which significantly differs frombusiness plans and budgets;

certain transactions (e.g. investment projects, loans, the establishment of subsidiaries, materialrelated party transactions and the acquisition or disposal of shareholdings above a certainquantum) which require the Board’s review and approval; andbreaches of confidential company information and trade secrets.

Upon the identification of such matters, and depending on the nature of each risk, the Board shouldundertake the necessary actions to manage or mitigate such risks and relevant members of managementstaff could be enlisted to assist in this process. Where possible, such business risks, the remedialaction(s) and regular status and progress reports should be clearly communicated to the company’sshareholders and other stakeholders (such as employees and community members).

21


Approach to Significant Business Risks

To assist the Board in discharging this responsibility, some Boards may ask its audit committee to takean oversight role to ensure that such a process is in place. Larger organisations may also appoint achief risk officer or set up a risk committee to oversee this process. By doing so, the Board is able toobtain an integrated perspective to risk management and to attain a high level of risk transparency,rather than receiving such information from fragmented and assorted oversight sources.

Board - Remuneration Matters

(a) Remuneration Committee

Highlights:

• Remuneration committees should comprise a majority of non-executive directors who areindependent. A member should be knowledgeable in the field of executive compensation, oralternatively, the committee should have access to expert advice.

• One of its key responsibilities is to recommend to the Board a framework of remuneration for theBoard and key executives.

Included within corporate governance best practices is the principle that there is “a formal and transparentprocedure for fixing the remuneration packages of individual directors”, and no “director should beinvolved in deciding his own remuneration” (Code, principle 7). To achieve this, the Code recommendsthat the Board set up a remuneration committee comprising a majority of non-executive directors whoareindependent of management and free from any business or other relationships, which may materiallyinterfere with the exercise of their independent judgement. This will minimise the risk of any potentialconflict of interest (Code, guidance note 7.1). Further, the Code recommends that the remunerationcommittee be chaired by an independent non-executive director, and have at least one member whois knowledgeable in the field of executive compensation, failing which the committee should haveaccess to expert advice inside and/or outside the company (Code, guidance note 7.2).

Under its terms of reference, the remuneration committee will recommend to the Board a frameworkof remuneration for the Board and key executives, and to determine specific remuneration packages foreach executive director and the CEO (or executive of equivalent rank) if the CEO is not an executivedirector. The committee’s recommendations should be made in consultation with the chairman of theBoard and submitted for endorsement by the entire Board. The committee should cover all aspects ofremuneration, including but not limited to directors’ fees, salaries, allowances, bonuses, options, andbenefits in kind (Code, guidance note 7.3). No director should participate in decisions on his/herown remuneration.

“Key executives” would generally include executive directors and senior management, and the levelof remuneration paid to these key executives should therefore be in accordance with the recommendationsof the remuneration committee.

22 Remuneration CommitteeLevel, Mix and Disclosure of Remuneration


(b) Level, Mix and Disclosure of Remuneration

Highlights:

• The remuneration of senior executives should be realistically commensurate with their responsibilitiesand risks involved, and also the company’s relative performance and other industry benchmarks.

• To motivate executives, performance-related elements (including long-term share incentive schemes)should form a significant portion of the total remuneration package.

• Appropriate and meaningful performance measures should be developed in conjunction with themembers of the nominating committee.

In determining the framework of remuneration, the remuneration committee should review the adequacyand form of the compensation of senior executives to ensure that the compensation is realisticallycommensurate with the responsibilities and risks involved in being an effective member. For “the level ofremuneration should be appropriate to attract, retain and motivate the directors needed to run the companysuccessfully but companies should avoid paying more for this purpose. A proportion of the remuneration,especially that of executive directors, should be linked to performance” (Code, principle 8).

For key executives, the Code (guidance note 8.2) states that “the performance-related elements ofremuneration should form a significant portion of the total remuneration package of executive directorsand should be designed to align their interests with those of shareholders” to give them an incentiveto perform at the highest levels and “link rewards to corporate and individual performance” so as toprovide sufficient motivation to promote long-term corporate value creation. Further, there “shouldbe appropriate and meaningful measures for the purpose of assessing” the performance of these keyexecutives, and measures could be developed in conjunction with those employed by the nominatingcommittee in their assessment of Board performance.

Long-term incentive schemes, including share schemes, are generally encouraged. The use of shareschemes, including share option schemes, should however be weighed against other kinds of long-termincentive schemes and performance-related incentives related to the share price development and thecontinuing success of the company. The remuneration committee should consider whether directorsshould be eligible for benefits under long-term incentive schemes.

For optimal effectiveness, the following factors should be considered in any share option schemes:

Minimum vesting period from grant date to exercise date.

Exercise price to be dependent on achieving or exceeding relevant and transparent benchmarks,for example, an industry index.Adequate disclosure of terms and conditions of the share option programme in the company’sfinancial statements.

Suitable precautions like closed blackout periods to ensure compliance with insider trading laws(see pg 19 Restrictions on Director’s Security Dealings and other Transactions for further details).

Refer to Code (guidance note 8.5) for other considerations regarding share schemes as well asChapter 8, Part VIII of the SGX-ST Listing Manual (Share Option Scheme or Share Schemes) on shareoptions sets out certain guidelines regarding the minimum vesting period and the required disclosuresto be included in the company’s annual report.

23Level, Mix and Disclosure of Remuneration


“In setting remuneration packages, the company should be aware of pay and employment conditionswithin the industry and in comparable companies. The remuneration packages should take intoaccount the company’s relative performance and the performance of individual directors”(Code, guidance note 8.1).

In making such comparisons, the Combined Code goes further to say that the remuneration committeeshould judge or determine how the company should be positioned, relative to other companies. Anycomparison should, however, be handled with caution as it can result in increases in remuneration thatare not related to corresponding improvement in performance (Combined Code, Part 2, Section 1, B.1.2).

For non-executive directors, their remuneration should be appropriate to the level of contribution,taking into account factors such as effort and time spent, and responsibilities of the directors.Non-executive directors should not be over-compensated to the extent that their independence maybe compromised. The Board may, if it considers necessary, consult experts on the remuneration ofnon-executive directors, and such remuneration should be recommended for approval at the AGM(Code, guidance note 8.3).

The remuneration committee should consider the various disclosure requirements for directors’remuneration, particularly those required by regulatory bodies such as the SGX, and ensure that thereis adequate disclosure in the financial statements to enhance transparency between the companyand relevant interested parties. Principle 9 of the Code also requires certain additional disclosuresand these have been summarised, together with all other disclosures as required by the Code, inAppendix 2 Corporate Governance Disclosure Summary.

DISCLOSURE AND TRANSPARENCY

As part of good corporate governance, companies “should engage in regular, effective and faircommunication with shareholders” (Code, principle 14) and in such communications, companiesshould embrace openness in their disclosure policy and strive to be transparent in their affairs andthe manner in which these are conducted. Some examples of how this may be achieved include thefollowing actions:

• disclose material information in a timely manner;

• avoid selective disclosure during meetings with investors;

• provide broad market disclosure to all retail and institutional investors, both local and foreign; and• provide and disclose information above and beyond statutory requirements.

The adoption and execution of these policies are, to a large extent, dependent on the Board and itsdirectives. There are significant advantages to a company in adopting an open policy and makinginformation readily accessible to investors and other interested users of its financial statements.

The expanding capital markets, the globalisation of businesses and markets, and the increasing complexityof business transactions have heightened the need and demand by investors for more information, so asto enable them to make informed decisions. While accounting standards and regulatory requirementshave become more structured to promote transparency, smaller retail investors have been more vocal atannual general meetings, questioning and scrutinising certain Board decisions before approving them.

24 Communication with Stakeholders


Communication with Stakeholders

Communication with Stakeholders

Highlights:

• An effective communications programme is critical for investors to understand the company’sstrategies and performance.

• In addition to investors, companies have other important stakeholders who are interested in thecompany’s performance and activities.

• A broader reporting model such as ValueReportingTM improves the relevance of corporate reports,and provides the flexibility to address other stakeholder issues.

In today’s environment where companies are under intense pressure to focus on creating and preservingshareholder value, an effective communications programme is critical to ensure that investors understandthe company’s value-based strategies and have assurance in management’s ability to deliver on them.To achieve this, and to add further value to historical financial information provided under the currentreporting model, companies may consider using ValueReportingTM. ValueReportingTM is a reportingmodel developed by PricewaterhouseCoopers that focuses on prospective cash flows and the dynamicsof shareholder value creation, as compared to current reporting models that are focused on historicalcost information. The use of such a reporting model not only broadens the scope of reporting beyondregulatory requirements, but it also improves the relevance of corporate reports.

All communications should originate from the senior representatives of the company, be they directorsor management. Direct communication with shareholders is only credible when all parties engagedin such communication understand the company’s strategy, business and risks. Clear and frequentcommunications signal a serious commitment to high level feedback. This will have a positive impacton the market’s perception of the company. For a discussion on shareholder communications,see pg 36 Accountability to Shareholders.

In addition to shareholders and the investment community, companies have other important stakeholders.These stakeholders bring with them varied expectations of the company and its role in the community. Anenhanced reporting model will enable the company to better meet these wider expectations. ValueReportingTM

provides the flexibility to address issues that are important to these stakeholders, which include employees,customers, suppliers, the surrounding community, environmental groups and government agencies.In fact, scrutiny of corporate responsibility has been escalating, and investors have expressed theirinterest and expectation for the Board to report how it has taken the interests of consumers, regulators,employees and other important groups that are affected by the company’s activities into consideration.

The main areas of concern to the various stakeholder groups may be broadly summarised as follows:

Stewardship: How management decisions are properly subject to appropriate oversight; establishmentand implementation of well-designed internal control procedures; adoption and communication ofcodes of conduct and ethics.

Environment: Protection of the environment; environmental responsibility in the workplace.

Health and safety: Adoption and communication of employees’ health and safety; healthy and safeproducts and services.

Communication: Communication and disclosure policies; marketing and advertising policies.

By being a good corporate citizen, and reporting this to the community, a company may enjoy certainspin-off benefits such as improved employee and investor recruitment and retention, as well as greatercustomer and supplier trust.

25


Establishment of Systems and Disclosure

Highlights:

• The users’ needs and demand for real-time information is increasing.

• The Board should establish the appropriate systems and processes to ensure that the requisitereports and disclosures are prepared and released on a timely basis.

• A company should understand and be prepared to use their users’ preferred medium ofcommunication where possible.

It is the Board’s duty to “provide the shareholders with a balanced and understandable assessment ofthe company’s performance, position and prospects on a quarterly basis. This responsibility extendsto interim and other price-sensitive public reports, and reports to regulators (if required)”(Code, guidance note 10.1).

The company should understand the needs of the primary users of these reports such as their investors,lenders and other stakeholders. It should aim to present reports with the highest level of disclosure so thatthese are understandable and useful, and the needs of these users are met. Further, the company should seekto understand their users’ preferred medium of communication and seek to use these where possible.For example, shareholders may prefer to receive and read published information on the Internet ratherthan receiving printed news and circulars that are mailed to them.

Consistent with the Code, one of the final recommendations set out in the DADC’s September 2001 reportrequires all listed companies (with financial years commencing on or after 1 January 2003, or earlierif possible) to make quarterly unaudited financial announcements, for financial periods on or after1 January 2003. Such quarterly announcements should be made within 60 days of quarter end, tobe reduced to 45 days for financial years commencing on or after 1 January 2004. Transforming acompany’s systems and procedures to meet this reporting timeframe requires rigorous planning andimplementation. These recommendations are expected to be incorporated in the relevant sections ofthe SGX-ST listing manual. As at the date of issue of this guide, these recommendations have yet tobe mandated.

At all times therefore, the Board should aim to ensure that systems and processes are in place toproduce financial reports that are true and fair, and that the integrity and consistency in their reports meetthe spirit as well as the letter of reporting standards. Further, the Board should ensure that the systemsare capable of producing regular reports of the company’s affairs (such as its quarterly and yearly profitannouncements) on a timely basis, with the right level of disclosures. As part of its regular communicationefforts, the dates of major regular publications such as its quarterly and annual reports should be determinedand planned in advance. In addition, the company’s processes should trigger all discussions and reviewsnecessary for the prompt publishing of any new facts arising out of the company’s activities which are notpublicly known and which are likely to significantly impact the company’s financial position, andpossibly, its share price.

It is of prime importance that the Board establish relevant systems and procedures, and appoint relevantpersonnel, where necessary, to ensure that all matters for announcement and disclosure are regularlyand promptly identified and released, especially the mandatory and legislated disclosure obligations.The following section summarises the significant non-financial disclosures which directors need to befamiliar with.

26 Establishment of Systems and Disclosure


Significant non-financial disclosures

Highlights:

• Reporting historical financial information to users of financial statements is no longerconsidered adequate.

• The focus on shareholder value extends corporate reporting to other non-traditional,non-financial matters such as company strategies, management discussion and analysis and othermanagement processes.

In addition to announcing and sharing the traditional financial measures, the company shouldconsider the disclosure of non-financial matters as well, such as:

company strategies and initiatives;

management discussion and analysis of company’s results and performance;

names of chairman, chief executive and senior independent directors;names of non-independent non-executive directors; and

report on state of internal controls.

In their final recommendations, the DASC set out in their September 2001 report the followingadditional disclosures to be included in the announcements and annual reports of listed companies:

cash flow statement;management discussion and analysis of the company’s financial performance, state of affairs andbusiness operations;

analysis of business outlook;

prospectus-type information relating to the backgrounds of directors and key management staff,risk management policies and processes; and

corporate governance practices and processes.

Most of these recommendations have since been taken on board in the revised regulations of regulatorssuch as the SGX.

Chapter 7 of the SGX-ST Listing Manual sets out those matters which should be immediately submittedto the SGX for public release. In addition to certain procedural matters, other matters to be submittedfor immediate announcement include the following:

any information which is likely to materially affect the price of the listed issuer’s securities;

the appointment or resignation of directors and other key executives;

material acquisitions and disposals of shares or other assets;applications for winding up, or the appointment of receivers, judicial managers or liquidators; or

certain material interested person transactions.

Rule 710(2) of the SGX-ST Listing Manual requires a listed company to describe and disclose itscorporate governance practices with specific reference to the Code in its annual report. As a quickreference guide, we set out in Appendix 2 a summary of the specific disclosures currently requiredby the Code.

Significant non-financial disclosures 27


Finally, Section 189 of the Securities And Futures Act (passed by Parliament on 5 October 2001) providesthat where a listed corporation is under an obligation to make disclosure under the listing rules of theexchange on which it is listed, the corporation must not intentionally, recklessly or negligently fail toinform the exchange of information that:

is not generally available; and

a reasonable person would expect, if it were generally available, to have a material effect on theprice or value of securities of the corporation quoted on the stock market of the exchange.

AUDITING AND COMPLIANCE

Under this category of corporate governance, the Board should establish policies and procedureswith due regard to the following:

• existence of audit committee and appropriate procedures (pg 28 Audit Committee);

• effectiveness of internal control processes (pg 32 Internal Control);

• internal audit mechanisms (pg 33 Internal Audit); and• external audit, and the independence of external auditors (pg 34 External Audit).

Audit Committee

As discussed on pg 18 Delegating Board Functions to Committees, the Board may delegate some of itsresponsibilities to certain board committees for the effective execution of its responsibilities. One suchimportant board committee which assists the Board in its oversight responsibilities is the audit committee.Section 201B of the Act requires every listed company to establish an audit committee. Further, theCode sets out that the Board “should establish an audit committee with written terms of referencewhich clearly set out its authority and duties” (Code, principle 11). At present, the SGX-ST ListingManual Best Practices Guide also requires each listed issuer to set up an audit committee whichreports to the board of directors.

Consideration should be given to making the terms of reference (or charter) of the audit committeeavailable, perhaps by inclusion in the annual report. As a best practice, it is recommended that theterms of reference be reviewed periodically (at least annually) against the committee’s own performance,to ensure that the objectives are being met. The Board should also review the committee’s terms ofreference regularly, to ensure that it promptly responds to the company’s changing needs.

The audit committee merely assists the Board with those responsibilities which have been delegated to thecommittee. It should not be taken to absolve the board of directors or any of those members not servingon the committee of their legal responsibilities as directors of the company (i.e. their fiduciary duties)to the shareholders and investors.

28 Audit Committee


(a) Membership of the Audit Committee

Highlights:

• Audit committees should comprise at least three directors, all non-executive, a majority of whomshould be independent.

• It is preferable that its members are financially literate, and that at least two members haveaccounting or related financial expertise.

• For optimal effectiveness, its members should be generally knowledgeable about regulatoryreporting requirements and generally accepted accounting principles

Under Section 201B of the Act, the audit committee should be composed of not fewer than threemembers, a majority of whom should be independent, as defined under the section. As a best practice,the Code recommends that the audit committee comprises at least three directors, all non-executive,the majority of whom, including the chairman, should be independent (Code, guidance note 11.1).

The selection of members should not only be based on the independence and objectivity of eachmember, but also his or her personal knowledge of the company’s operations and their other financialreporting, internal controls, accounting and auditing experience. It is preferable that the audit committeemembers be “financially literate” (i.e., able to read and understand financial statements), or that theybecome financially literate within a reasonable period of time after their appointment. In generalterms, the Code recommends that the Board should ensure that the members of the audit committeeare appropriately qualified to discharge their responsibilities, and that at least two members haveaccounting or related financial management expertise, as the Board interprets such qualification in itsbusiness judgement (Code, guidance note 11.2). Appropriate training and guidance should be providedto new members of the audit committee.

(b) Roles and Responsibilities of the Audit Committee

Highlights:

• The audit committee’s key responsibility is to assist the Board in its review and control of allfinancial aspects of the company.

• The scope of the committee’s duties will necessitate regular interaction with the key financialexecutives, internal auditor as well as external auditor.

• The committee should have explicit authority to investigate any matter within its term ofreference, with full access to and co-operation from management, and reasonable resources toenable it to effectively discharge its duties.

The main objectives of the audit committee are as follows:

help the Board to fulfil its responsibilities for the company’s financial reporting, operation ofacceptable risk management processes and the monitoring of the internal control systems;

29


Membership of the Audit CommitteeRoles and responsibilities of the Audit Committee

Example:The audit committee can:

assist the board in ensuring not only that the annual financial statements give a true andfair view, but also that the company’s business and assets are properly managed for thebenefit of the shareholders; and

determine that adequate internal controls systems have been maintained by management.

serve as an independent and objective party to review financial information prepared bymanagement prior to its release to shareholders and the general public; and

maintain channels of communication with the Board and direct communication channels with theexternal auditors, internal auditors and financial management, to discuss and review specific issuesas appropriate.

To be more effective in its review responsibility, the audit committee members should be generallyknowledgeable about regulatory reporting requirements and generally accepted accounting principles.As part of their review, they should satisfy themselves that the management has taken the necessaryprecautions to ensure that financial information released to the public and regulators is presented inaccordance with financial reporting and regulatory disclosure rules. For optimal effectiveness, managementshould provide the audit committee with regular updates on significant business risks that the companymay be facing.

The committee “should have explicit authority to investigate any matter within its terms of reference,full access to and co-operation by management and full discretion to invite any director or executiveofficer to attend its meetings, and reasonable resources to enable it to discharge its functions properly”(Code, guidance note 11.3). The committee should be able to obtain external professional advice andto invite outsiders with relevant experience to attend, if necessary.

The scope of the audit committee’s specific duties should be determined with the company’s needs inmind, but should normally include:

reviewing with the external auditors, their audit plan, evaluation of the internal accounting controls,audit report and any matters which the external auditors wish to discuss, without the presence ofexecutive board members;

reviewing with the internal auditors, the scope and results of internal audit procedures and theirevaluation of the internal control system;

reviewing the half-yearly and yearly financial statements, including interested person transactionsand other announcements to shareholders and the SGX, prior to submission to the Board;

commissioning internal investigations and reviewing any significant findings;making recommendations to the Board on the appointment of the external auditors, the audit feeand the issue of resignation or dismissal (see pg 34 External Audit);

reviewing and approving, where possible in advance of the event, the appointment, replacement,reassignment, or the dismissal of the chief internal auditor;

reviewing the assistance given by the company’s officers to the external and internal auditors;

carrying out such other functions as may be agreed to by the audit committee and the Board.

30 Roles and responsibilities of the Audit Committee


Specifically under the Code (guidance note 11.4), the “duties of the audit committee should includekeeping under review the scope and results of the audit and its cost effectiveness and the independenceand objectivity of the external auditors. Where the auditors also supply a substantial volume ofnon-audit services to the company, the committee should keep the nature and extent of such servicesunder review, seeking to balance the maintenance of objectivity and value for money”. Further,the Code (guidance note 11.6) recommends that the audit committee “should review the independenceof the external auditors annually”.

Under Section 201B(5) of the Act, the audit committee’s specific functions are to:

review with the external auditors:

– their audit plan;– their evaluation of the system of internal accounting controls; and

– their audit report;

review the assistance given by the company’s officers to the external auditors;

review the scope and results of the internal audit procedures;

review the annual financial statements and consolidated financial statements; and submit them tothe board of directors for approval; andnominate the external auditors.

In addition, the audit committee “should ensure that the internal audit function is adequately resourcedand has appropriate standing within the company” (Code, guidance note 13.3).

(c) Audit Committee Meetings and Agenda

Highlights:

• The committee should meet at least three times a year. The timing of these meetings is usuallydictated by events in the company’s financial calendar. With the expected introduction of quarterlyreporting, the frequency of these meetings may need to increase.

• The external auditor, internal auditor and finance director should normally attend these meetings.

• At least once a year, the committee should meet with the external auditor, and with the internalauditor, without the presence of company’s management.

The number of meetings to be held during the year is a matter each audit committee should decidebased on the company’s and the committee’s particular circumstances and needs. In general, it is notedthat one meeting a year is insufficient. Experience indicates that there are at least three occasions ineach year when the committee may benefit from having a meeting.

The timing of the meetings is important, and should be dictated to a certain extent by events in thefinancial year, in particular, the release of interim and final announcements to shareholders. Additionalmeetings may be necessary to review ad hoc items, such as acquisition circulars, rights issue documents,interested party disclosures and special investigations.

The external auditor and internal auditor should normally attend audit committee meetings, as shouldthe finance director. Relevant board members may also be invited to attend. However, the committee

Audit Committee Meetings and Agenda 31


should meet with the external auditors, and with the internal auditors, without the presence of company’smanagement, at least annually (Code, guidance note 11.5), to ensure that there are no unresolvedissues of concern.

Under Section 201(B)(6) and (7) of the Act, the external auditors have the right to convene a meeting andbe heard at any meeting. As a corollary, the committee can require the external auditors to appear before it.

In preparing an agenda for the meeting, the chairman of the audit committee should solicit views ofthe external auditors, internal auditors, management and others regarding the relevant topics to bediscussed. If appropriate, these groups should prepare reports on the agreed agenda topics.

The agenda and supporting documentation should be circulated well in advance of meetings.In addition to attending these meetings, audit committee members should make prior preparation byreading the materials circulated, familiarising themselves with current financial reporting practicesand acquiring an understanding of the audit function. Where practical, answers to questions posedby committee members should be prepared by management or the auditors, and circulated beforemeetings. These practices will allow committee members to be better prepared in advance of themeeting, and should result in more informed discussions.

Minutes of audit committee meetings should be circulated to all members of the Board. Where appropriate,the chairman of the audit committee may direct that minutes or extracts of such minutes be providedto management, the internal auditors and/or the external auditors.

Internal Control

Highlights:

• Every company should have a sound system of internal controls to safeguard the shareholders’investment and the company’s assets.

• The nature and type of internal controls to be established depends on the size and nature ofthe company.

• The audit committee should review the effectiveness of the company’s material internal controls atleast once a year.

An essential part of the efficient management of a company is an effective internal control process.Internal controls, broadly defined by the Committee of Sponsoring Organisations of the TreadwayCommission (COSO), is a process effected by an entity’s board of directors, management and otherpersonnel, designed to provide reasonable assurance regarding the achievement of objectives in thefollowing categories:

effectiveness and efficiency of operations;

reliability of financial reporting; and

compliance with applicable laws and regulations.

32 Internal Control


(The Treadway Commission on fraudulent financial reporting was a private sector initiative jointlysponsored by several US organisations, including the American Institute of Certified Public Accountants.The COSO document, Internal Control - Integrated Framework, was prepared in response to therecommendations of the Treadway Commission in its report issued in 1987. The COSO framework providesguidance on internal control and establishes benchmarks that could be used for evaluating internal controls.)

Under the Code, the “Board should ensure that the management maintains a sound system of internalcontrols to safeguard the shareholders’ investments and the company’s assets” (Code, principle 12).The determination of what is a ‘sound’ system of internal controls is highly judgemental and subjective.In this regard, the Singapore Companies Act is more explicit in that Section 199(2A) of the Actrequires every Singapore-incorporated public listed company to devise and maintain a system ofinternal controls sufficient to provide reasonable assurance that:

assets are safeguarded against loss from unauthorised use or disposition; and

transactions are properly authorised and that they are recorded as necessary to permit thepreparation of true and fair profit and loss accounts and balance sheets and to maintainaccountability of assets.

Specific internal controls that a company should establish will depend on:

the size of the company;

its organisation and ownership characteristics (e.g. owner-managed or separate managementand ownership);

the nature of its business activities (e.g., where there are many transactions in cash);

the diversity and complexity of its operations;

the company’s methods of processing data; andits regulatory environment.

The directors, through the audit committee, should ensure that a review of the effectiveness of thecompany’s material internal controls, including financial, operational and compliance controls, andrisk management, is conducted at least annually. Such a review can be carried out by the internaland/or external auditors (Code, guidance note 12.1).

Under the Companies Act, the audit committee is required to review with the external auditors their evaluationof the internal accounting control system, and to review the scope and results of internal audit procedures.

Internal Audit

Highlights:

• An effective element of internal control is the establishment of an independent internal audit function.

• For maximum effectiveness, the internal auditor should meet or exceed the auditing standards setby nationally or internationally recognised professional bodies, and be adequately resourced.

• The internal audit function should have a primary line of reporting to the chairman of the auditcommittee, and its adequacy should be reviewed by the audit committee at least once a year.

Internal Audit 33


Whilst management is responsible for devising and maintaining the system of internal control, it maydelegate the review of the adequacy of risk management systems and internal controls to an internalaudit function. Such a review by the internal auditors is itself an element of internal control. It is goodpractice to establish an internal audit function to undertake regular monitoring of key controls andprocedures. Internal audit should be an integral part of a company’s system of internal control whichhelps to ensure its effectiveness. Whilst the Companies Act and the SGX-ST Listing Manual implicitlyrecommend the establishment of this function, the Code explicitly states that the “company shouldestablish an internal audit function that is independent of the activities that it audits” (Code, principle 13).For maximum effectiveness, the Code recommends that the internal auditor “should meet or exceedthe standards set by nationally or internationally recognised professional bodies including theStandards for the Professional Practice of Internal Auditing set by The Institute of Internal Auditors”(Code, guidance note 13.2).

Internal audit serves as an independent appraisal function within an organisation, established for thereview of financial and other operations as a proactive and constructive service to management.The availability and existence of the internal audit function is essential to assist the audit committeein effectively discharging their duties. It is recommended that the internal auditors’ primary line ofreporting should be to the chairman of the audit committee, although the internal auditor may alsoreport functionally and administratively to the chief executive officer (Code, guidance note 13.1).Having unrestricted access and regular meetings with the audit committee both ensures andenhances the independence of the internal audit function.

Internal audit and the audit committee have common goals of ensuring the adequacy and effectivenessof the company’s system of internal control. However, the audit committee has overall responsibilityfor overseeing and assessing the quality of the company’s internal audit efforts, and it does not assumeresponsibility for the day-to-day operations of internal audit. Instead, it “should ensure that the internalaudit function is adequately resourced, and has appropriate recognition and standing within thecompany. For the avoidance of doubt, the internal audit function can either be in-house, outsourcedto a reputable accounting/auditing firm, or performed by a major shareholder, holding company,parent company or controlling enterprise with an internal audit staff” (Code, guidance note 13.3).

The audit committee should, at least annually, ensure the adequacy of the internal audit function(Code, guidance note 13.4). Specifically, Section 201B(5)(a)(iv) of the Act requires the audit committeeto review the scope and results of the internal audit function.

External Audit

Highlights:

• The audit committee should review the scope and results of the external audit, including assessingthe quality of the company’s accounting policies and principles.

• The audit committee should evaluate the objectivity and independence of the externalauditors annually.

34 External Audit


The Board, through its audit committee, should establish formal and transparent arrangements formaintaining an appropriate relationship with the external auditors. In addition to reviewing the auditplan with the external auditors, the audit committee should also review the annual financial statementswith the management and the external auditors and make recommendations to the Board regardingthe appointment or re-appointment of the auditors for each year.

To fulfil this latter responsibility, audit committees should:

evaluate the auditors’ objectivity and independence, and take or recommend appropriate actionto ensure the independence of the external auditor;

evaluate the quality of professional services received, the knowledge of the industry displayed,and the nature and availability of cross-border services if these could be of benefit to the company;

assess the cost effectiveness of the external auditors’ work;

obtain comments and recommendations from management; andmake a written recommendation to the Board for ultimate shareholder approval regarding theappointment of external auditors.

Refer to pg 29 Roles and Responsibilities of the Audit Committee for a further discussion.

In addition, the audit committee should seek to discuss with the external auditors, their judgementabout the quality, not just the acceptability, of the company’s accounting policies and principles.Such discussions should include issues such as:

the clarity of the company’s financial disclosures;the degree of aggressiveness or conservatism of the company’s accounting principles andunderlying estimates;

significant adjustments and new accounting policies;

disagreements with management; and

other significant decisions made by management in their preparation of the financial disclosures.

According to Rules 710 to 718 of the SGX-ST Listing Manual, the following rules regarding theappointment of external auditors should be borne in mind:

(a) Suitability – regard should be given to the adequacy of the resources and experience of theaccounting firm, appropriate to the size and complexity of the company’s operations.Notwithstanding a firm’s suitability, the SGX has the right to object to any particular appointmentand to require a replacement or to appoint another firm.

(b) Same auditors for group companies – generally, a company should engage the same firm basedin Singapore to audit the company and all its Singapore subsidiaries and associated companiesin which it has management control.

(c) Foreign-incorporated subsidiaries and associated companies – where 20 percent or more of theconsolidated net tangible assets, or where 20 percent or more of the pre-tax profits are derivedfrom a foreign-incorporated subsidiary or associated company, a suitable auditor must beappointed to audit these significant foreign subsidiaries or associated companies.

(d) Disclosure and rotation – the name of the audit partner in charge of the audit should be disclosedin the annual report. Further, the audit partner should be changed at least once every five years.

External Audit 35


ACCOUNTABILITY TO SHAREHOLDERS

As set out in principle 10 of the Code, the “Board is accountable to the shareholders while the managementis accountable to the Board”. Hence, in addition to the previously discussed aspects of corporategovernance which ultimately relate to proper accountability to the company’s shareholders, the company,through its board of directors, should establish procedures which ensure the following:

• regular, effective and fair communication with shareholders (Code, principle 14);• greater shareholder participation at annual general meetings (Code, principle 15);

• fair treatment of all shareholders, particularly in the area of communications, and protection ofminority shareholder rights, for example, by reviewing the necessary quorums and majoritypercentage rules for certain key decisions which require shareholder approval.

Shareholders’ interests and perspectives are of paramount importance to the Board, for the directorshave been elected by the shareholders to operate as stewards and trustees of the company’s assets.

Reporting to Shareholders

Highlights:

• Information should be disseminated equally to all shareholders.• In disclosing information, companies should be as descriptive, detailed and forthcoming as possible,

and avoid boiler plate disclosures.

As part of a company’s regular communications, the “Board should provide the shareholders with abalanced and understandable assessment of the company’s performance, position and prospectus ona quarterly basis” (Code, guidance 10.1).

The company should pursue the principle of equal treatment of all shareholders in the matter ofinformation dissemination, and should not engage in any conduct inconsistent with the insider tradinglaws. With regard to institutional investors, companies should give due consideration to the value ofinstitutional feedback and their expectations, and evaluate the usefulness of institutional informationsuch as their analysis of the company’s overall market standing, comparisons of performance relativeto peers and so on. Where there is inadvertent disclosure made to a selected group, companies shouldmake the same disclosure publicly to all others as soon as is practicable. One way of doing so couldbe through the use of modern technology such as Internet websites (see Code, guidance note 14.2).

To establish a mutual understanding of objectives, companies should, as far as is practicable, enterinto dialogue with all shareholders. The Code recommends under guidance note 14.1 that companies“should regularly convey pertinent information, gather views or inputs, and address shareholders’concerns. In disclosing information, companies should be as descriptive, detailed and forthcomingas possible, and avoid boilerplate disclosures”. The mode of conveyance of such information canbe through formal corporate reports and announcements, or informally at shareholders’ meetings ordialogue sessions.

36 Reporting to Shareholders


Disclosure and Transparency on pages 24 to 28 discusses in greater detail matters related tocommunication to shareholders and other stakeholders, and in particular, the non-financial matterswhich are of interest and concern to these other interested parties.

Meetings with Shareholders

Highlights:

• Companies should encourage greater shareholder participation at AGMs by ensuring that areasonable time is allocated for this purpose.

• Major corporate activities which may impact shareholder value, as well as the election andremuneration of directors, should be submitted to a vote of shareholders.

• Each distinct issue should be separately tabled for shareholder voting.

The Annual General Meeting (AGM) is the most feasible medium for effective communication with allshareholders. Under principle 15 of the Code, companies “should encourage greater shareholderparticipation at AGMs, and allow shareholders the opportunity to communicate their views on variousmatters affecting the company”. One way of encouraging active participation at these meetings is byensuring that a reasonable amount of time is allocated for this purpose. The Code further recommendsthat the chairpersons of the audit, nominating and/or remuneration committees should be present andavailable to address questions at general meetings (Code, guidance note 15.3). The external auditorsmay also be present to assist the directors in addressing any relevant queries by shareholders. Noticesfor such meetings should contain sufficient information to enable a reasonably prudent member todecide whether or not to attend the meeting.

Alternatively, the company could consider hosting or conducting suitable conferences for the directorsand senior management to meet and hold dialogue with its shareholders. The Board could delegateand empower staff of the company’s media and communications department to implement andoversee the company’s investor relations programme and shareholder communication policy. Allappointed spokespersons should be properly trained and prepared, so that appropriate responsesmay be spontaneously provided during such open conferences.

Major corporate changes which in substance or effect may impact shareholder equity or erode shareownership rights should be submitted to a vote of shareholders. Also, shareholders’ input with regardto the election of directors should be obtained by way of their involvement and voting at the AGM.With regard to the remuneration of the directors and key executives who are not directors, the Coderecommends that the “Board’s annual remuneration report need not be a standard term of agenda forAGMs. The Board should, however, consider each year whether the circumstances are such that theshareholders at the AGM should be invited to approve the policy set out in the report and shouldminute their conclusions” (Code, guidance note 9.5).

Shareholders should have the opportunity to participate effectively and to vote in AGMs. They shouldbe allowed to vote in person or in absentia, and equal effect should be given to votes whether cast inperson or in absentia. In this regard, companies are encouraged to make the appropriate provisions

Meetings with Shareholders 37


in their articles of association to allow for absentia voting methods such as by mail, email and fax, ifthe shareholders so consent (Code, guidance note 15.1). At present, the more common and practicalabsentia voting methods are the use of proxies, votes cast by mail, and the conduct of meetings byvideo-conferencing.

Enough time and information (including a balanced assessment of relevant issues and independentadvisers’ reports) should be given to shareholders to enable them to make informed judgements onthese resolutions. Where necessary, the Board should evaluate the rights of controlling shareholders tovote in such defined circumstances. Further, directors and persons connected to directors or controllingshareholders interested in a transaction should not vote as a shareholder in respect of such transactions.

At general meetings, separate issues should not be combined and presented as one single motion forvoting by the shareholders, for there “should be separate resolutions at general meetings on eachdistinct issue” (Code, guidance note 15.2). This ensures that shareholders have better exercise of theirright to approve or deny each issue or motion.

Section 189 of the Companies Act requires the minute books to be kept at either the company’sregistered office or its principal place of business, and to be open to the inspection of any memberwithout any charge. Further, a shareholder is entitled to request for a copy of any minutes, at a chargenot exceeding $1 for every page, and the company is required to provide this to the member within14 days of such a request.

Shareholders should have the right to attend company meetings where they can raise questions aboutthe affairs of the company. Also, companies, through their investor relations programme and shareholdercommunication policy, should have a policy and practice of making presentations to interested shareholders.

38 Meetings with Shareholders


For completeness, corporate governance best practices would also require attention to be given to acompany’s corporate ethics. The Board or an appointed ethics committee should establish a Code ofConduct for the company which applies to all employees of the organisation. This Code of Conductshould set out the standards to which employees are expected to conform.

Employees are required to act with the utmost integrity and objectivity at all times in their dealingswith each other, competitors, customers, suppliers, the company and the community. The Code ofConduct should be applied according to the letter as well as spirit of the Code. The ethics committee,together with the audit committee and internal auditors, should monitor adherence to this Code ofConduct. Areas which are likely to be covered by this Code include the following:

• conflicts of interests;• business gifts, favours and entertainment;

• confidentiality of company data and information;

• maintenance of an adequate system of internal control;

• operational records and books of accounts;• relationships with suppliers;

• relationships with regulators and compliance with regulations including taxes, customsand business licences;

• political activities and contributions;

• conduct of company towards employees;• conduct of employees acting on company’s behalf;

• conduct in the community and charitable contributions;

• customer relations and product quality; and

• grievance procedures.

The company, through the ethics committee, should regularly review and update the Code of Conductas necessary to ensure that it reflects the highest standard of integrity and professionalism.

This Code of Conduct should be published and made accessible to all employees. New employees tothe company should be briefed on the requirements of the Code of Conduct. This Code of Conductshould be available to the company’s shareholders at their request.

CORPORATE ETHICSPART 3

Corporate Ethics 39


APPENDIX 1 - KEY SOURCES OF INFORMATION:

1. Report of the Corporate Governance Committee and Code of Corporate Governance (21 March 2001)

2. The Combined Code (1998) published by the London Stock Exchange. Sole licence to reproducethe Combined Code is held by Gee Publishing Ltd, United Kingdom.

3. The Toronto Stock Exchange Committee on Corporate Governance in Canada – Guidelines forImproved Corporate Governance (1995)

4. Corporate Governance – A Guide for Investment Managers and Corporations – Australian InvestmentManagers’ Association (July 1997)

5. German Panel on Corporate Governance – Corporate Governance Rules for Quoted GermanCompanies (January 2000)

6. Singapore Exchange Securities Trading Listing Manual (May 2002)

7. Singapore Companies Act, Cap. 50

8. Malaysian Code of Conduct for Market Institutions (2000)9. United States’ Recommendation of the Blue Ribbon Committee on Improving the Effectiveness

of Corporate Audit Committees (Feb 1999)

10. Audit Committees – Good Practices for Meeting Market Expectations, PricewaterhouseCoopers(May 1999)

11. SID Members’ Handbook/CCH Essentials for Effective Directorship (December 2000)

PART 4APPENDICES

40 Key Sources of Information


Corporate Governance Disclosure Summary 41


APPENDIX 2 - CORPORATE GOVERNANCE DISCLOSURE SUMMARY

Rule 710(2) of the SGX-ST Listing Manual requires a listed company to describe and disclose itscorporate governance practices in its Annual Report, and give explanations for deviations from theguidelines set out in the Code.

This Sample Annual Report Disclosure Checklist is designed to facilitate the Company Secretary inassessing a company’s compliance with the disclosure guidelines of the Code.

FINANCIAL YEAR:

CCG Disclosure Requirements Responsibility Yes/No/NARef

BOARD MATTERS

1.1 Number of board meetings held Co Sec

Attendance of board member at board meetings Co Sec

Name of committees established by the Board Co Sec

Number of meetings of these committees each Co Sec

Attendance of these meetings by members of these committees Co Sec

1.2 Type of material transactions that require board approval Co Sec

4.5I Indicate which directors are executive, non-executiveand independent NC

2.2 If a director has one or more of the relationships mentioned& 4.3 in paragraph 2.1/2.2 of the Code yet is considered by the

NC as independent, to disclose in full the nature of thedirector’s relationship and the rationale why he should beconsidered independent

NC

3.1 To disclose the relationship between the Chairman and theGroup MD if they are related to each other NC

4.1 Members of the NC Co Sec

4.5 Key information regarding directors - academic andprofessional qualifications, shareholding in the companyand its subsidiaries, board committees served on (as a memberor chairman), date of first appointment as a director, date of NClast re-election as a director, directorships or chairmanshipsboth present and those held over the preceding three years inother listed companies and other major appointments.

The name of directors submitted for election or re-electionshould be accompanied by details and information (as above) Co Secto enable shareholders to make informed decisions.

Key: AC - Audit Committee CCG - Code of Corporate Governance Co Sec - Company Secretary

MD - Managing Director NC - Nominating Committee RC - Remuneration Committee

CCG Disclosure Requirements Responsibility Yes/No/NARef

5.3 The assessment process carried out by the NC to assess the NCeffectiveness of the Board as a whole and the contribution ofeach individual director to the effectiveness of the Board

REMUNERATION MATTERS

9 The remuneration policy, level and mix of remuneration, and RCthe procedure for setting remuneration

9.1 Members of the RC Co Sec

9.1 The names of directors and at least the top five key executives& 9.2 of the Group (who are also not directors) earning remuneration

which falls within bands of S$250,000.RC

Within each band, there should be a breakdown(in percentage terms) of each director’s remuneration earnedthrough base/fixed salary, variable or performance-relatedincome/bonuses, benefits in kind, and stock options grantedand other long-term incentives.

Best practice - disclose the remuneration of each individual director RC

9.3 Similar details (as set out in 9.1/9.2 above) of the remunerationof employees who are immediate family members of a directoror the Group MD, and whose remuneration exceeds S$150,000 RCduring the year. This may be done on a no-name basis with aclear indication of which director or Group MD the employeeis related to.

9.4 Details and terms of employee share schemes, including thepotential size of grants, methodology of valuing stock options,exercise price of options that were granted, as well as outstanding,whether the exercise price was at the market price or otherwiseon the date of grant, market price on date of exercise, the vestingschedule, and the justifications for the terms adopted.

RC

ACCOUNTABILITY AND AUDIT

11.7 Members of the AC Co Sec

11.7 Details of the AC’s activities AC

Number of meetings held Co Sec

Attendance of individual directors at meetings Co Sec

12.2 Adequacy of the company’s internal controls AC

Key: AC - Audit Committee CCG - Code of Corporate Governance Co Sec - Company Secretary

MD - Managing Director NC - Nominating Committee RC - Remuneration Committee

42 Corporate Governance Disclosure Summary


BOARD MATTERS

The Board’s Conduct of Its Affairs

Principle:

1 Every company should be headed by an effective Board to leadand control the company.

Guidance Notes:1.1 The Board should meet regularly and as warranted by particular

circumstances, as deemed appropriate by the board members.Companies are encouraged to amend their Articles of Associationto provide for telephonic and video conference meetings.The number of board meetings held in the year, as well as theattendance of every board member at those meetings andmeetings of specialised committees established by the Board,should be disclosed in the company’s annual report.

1.2 Companies should adopt internal guidelines setting forth mattersthat require board approval, and specify in their corporategovernance disclosures the type of material transactions thatrequire board approval under such guidelines.

1.3 Every director should receive appropriate training (including hisor her duties as a director and how to discharge those duties)when he is first appointed to the Board. This should include anorientation-training programme to ensure that incoming directorsare familiar with the company’s business and governancepractices. It is equally important that directors should receivefurther relevant training, particularly on relevant new laws,regulations and changing commercial risks, from time to time.

PwC Reference

See page 9Role of the Board

See page 16Frequency andConduct of Meetings

See page 41Corporate GovernanceDisclosure Summary

See page 15Mechanisms forProviding Leadershipand Management Interaction


See page 16Mechanisms forProviding Leadershipand Management Interaction

APPENDIX 3 - CODE OF CORPORATE GOVERNANCE WITH PwC ANNOTATIONS

Code of Corporate Governance with PwC Annotations 43


Guidance Notes:

2.1 There should be a strong and independent element on the Board,with independent directors making up at least one-third of theBoard. An “independent” director is one who has no relationshipwith the company, its related companies1 or its officers that couldinterfere, or be reasonably perceived to interfere, with the exerciseof the director’s independent business judgement with a view tothe best interests of the company. Examples of such relationships,which would deem a director not to be independent, include:

a a director being employed by the company or any of its relatedcompanies for the current or any of the past three financial years;

b a director who has an immediate family member2 who is, orhas been in any of the past three financial years, employed bythe company or any of its related companies as a seniorexecutive officer whose remuneration is determined by theremuneration committee;

c a director accepting any compensation from the company orany of its related companies other than compensation for boardservice for the current or immediate past financial year; or

d a director being a substantial shareholder of or a partner in(with 5% or more stake), or an executive officer of, any for-profit business organisation to which the company made,or from which the company received, significant paymentsin the current or immediate past financial year. As a guide,payments3 aggregated over any financial year in excess ofS$200,000 should generally be deemed significant.

1 A related company in relation to a company includes its subsidiary, fellow subsidiary, or parent company.2 As defined in the Listing Manual of the Singapore Exchange to mean the spouse, child, adopted child, step-child, brother, sister and parent.3 Payments for transactions involving standard services with published rates or routine and retail transactions and relationships

(for instance credit card or bank or brokerage or mortgage or insurance accounts or transactions) will not be taken into account,unless special or favourable treatment is accorded.

See page 10Size and Compositionof the Board

See page 12Characteristics ofIndependent Directors

44

BOARD COMPOSITION AND BALANCE

Principle:

2 There should be a strong and independent element on theBoard, which is able to exercise objective judgement on corporateaffairs independently, in particular, from Management.No individual or small group of individuals should be allowedto dominate the Board’s decision making.


Code of Corporate Governance with PwC Annotations


2.2 The four relationships set out above are not intended to beexhaustive, and are examples of situations which woulddeem a director to be not independent. If the companywishes, in spite of the existence of one or more of theserelationships, to consider the director as independent, itshould disclose in full the nature of the director’s relationshipand bear responsibility for explaining why he should beconsidered independent.

2.3 The Board should examine its size and, with a view todetermining the impact of the number upon effectiveness,decide on what it considers an appropriate size for theBoard, which facilitates effective decision making.The Board should take into account the scope and natureof the operations of the company.

2.4 The Board should comprise directors who as a groupprovide core competencies such as accounting or finance,business or management experience, industry knowledge,strategic planning experience and customer-based experienceor knowledge.

CHAIRMAN AND CHIEF EXECUTIVE OFFICER

Principle:3 There should be a clear division of responsibilities at the top

of the company - the working of the Board and the executiveresponsibility of the company’s business - which will ensurea balance of power and authority, such that no one individualrepresents a considerable concentration of power.

Guidance Notes:

3.1 The roles of chairman and chief executive officer (“CEO”)should in principle be separate, to ensure an appropriatebalance of power, increased accountability and greatercapacity of the Board for independent decision making.In addition, companies should disclose the relationshipbetween the chairman and CEO where they are related toeach other (i.e. be of the same immediate family, as definedin footnote 2).

3.2 The chairman should:

a schedule meetings that enable the Board to perform itsduties responsibly while not interfering with the flow ofthe company’s operations;

b prepare meeting agenda in consultation with the CEO;



Code of Corporate Governance with PwC Annotations 45


See page 13Characteristics ofIndependent Directors



See page 16Frequency and Conductof Meetings



See page 16Frequency and Conductof Meetings



c exercise control over quality, quantity and timeliness ofthe flow of information between Management and the Board;and

d assist in ensuring compliance with company’s guidelineson corporate governance.

3.3 The responsibilities set out in the above guidelines pertainonly to the chairman’s role in respect of board proceedings.It should not be taken as a comprehensive list of all theduties and responsibilities of a chairman.

BOARD MEMBERSHIP

Principle:4 There should be a formal and transparent process for the

appointment of new directors to the Board. As a principle ofgood corporate governance, all directors should be requiredto submit themselves for re-nomination and re-election atregular intervals.

Guidance Notes:

4.1 Companies should establish a Nominating Committee(“NC”) to make recommendations to the Board on all boardappointments. The NC should comprise at least three directors,a majority of whom, including the chairman, should beindependent. The NC should have written terms of referencethat describes the responsibilities of its members, and itsmembership is disclosed annually.

4.2 The NC should be charged with the responsibility of re-nominationhaving regard to the director’s contribution and performance(e.g. attendance, preparedness, participation and candour)including, if applicable, as an independent director. As aprinciple of good corporate governance, all directors shouldbe required to submit themselves for re-nomination andre-election at regular intervals and at least every three years.

4.3 The NC is also charged with determining annually whether ornot a director is independent, bearing in mind the circumstancesset forth in paragraph 2.1 and any other salient factors. If theNC determines that a director who has one or more of therelationships mentioned therein is in fact independent, thecompany should make such disclosure as stated in paragraph 2.2.

See page 13Selection and Appointmentsof Directors


See page 14Nominating Committee






46



4.4 When a director has multiple board representations, he or shemust ensure that sufficient time and attention is given to theaffairs of each company. The NC should decide whether or not adirector is able to and has been adequately carrying out his/herduties as director of the company. Internal guidelines should beadopted that address the competing time commitments that arefaced when directors serve on multiple boards.

4.5 Key information regarding directors, such as academic andprofessional qualifications, shareholding in the company andits subsidiaries, board committees served on (as a member orchairman), date of first appointment as a director, date of lastre-election as a director, directorships or chairmanships bothpresent and those held over the preceding three years in otherlisted companies and other major appointments, should bedisclosed in the annual report. In addition, the company’sannual disclosure on corporate governance should indicatewhich directors are executive, non-executive or consideredby the NC to be independent. The names of the directorssubmitted for election or re-election should also beaccompanied by such details and information to enableshareholders to make informed decisions.

BOARD PERFORMANCE

Principle:

5 There should be a formal assessment of the effectiveness of theBoard as a whole and the contribution by each director to theeffectiveness of the Board.

Guidance Notes:

5.1 The NC should decide how the Board’s performance may beevaluated and propose objective performance criteria.Such performance criteria, that allow comparison with itsindustry peers, should be approved by the Board and addresshow the Board has enhanced long-term shareholders’ value.These performance criteria should not be changed from year toyear, and where circumstances deem it necessary for any of thecriteria to be changed, the onus should be on the Board tojustify this decision.

5.2 In addition to any relevant performance criteria which the Boardmay propose, the performance evaluation should also considerthe company’s share price performance over a five-year periodvis-a-vis the Singapore Straits Times Index and a benchmark indexof its industry peers. Other performance criteria that may be usedinclude return on assets (“ROA”), return on equity (“ROE”), returnon investment (“ROI”), economic value added (“EVA”) andprofitability on capital employed.


See page 18Review Of BoardPerformance


See page 17Review of BoardPerformance




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5.3 Every Board should implement a process to be carried out bythe NC for assessing the effectiveness of the Board as a wholeand for assessing the contribution by each individual directorto the effectiveness of the Board. This assessment processshould be disclosed annually.

ACCESS TO INFORMATION

Principle:

6 In order to fulfil their responsibilities, board members shouldbe provided with complete, adequate and timely informationprior to board meetings and on an on-going basis.

Guidance Notes:6.1 Management has an obligation to supply the Board with

complete, adequate information in a timely manner.Reliance purely on what is volunteered by Management isunlikely to be enough in all circumstances and furtherenquiries may be required if the particular director is tofulfil his or her duties properly. Hence, the Board shouldhave separate and independent access to the company’ssenior management.

6.2 Information provided should include background or explanatoryinformation relating to matters to be brought before theBoard, copies of disclosure documents, budgets, forecastsand monthly internal financial statements. In respect ofbudgets, any material variance between the projectionsand actual results should also be disclosed and explained.

6.3 Directors should have separate and independent access tothe company secretary. The role of the company secretaryshould be clearly defined and should include responsibilityfor ensuring that board procedures are followed and thatapplicable rules and regulations are complied with.The company secretary should attend all board meetings.

6.4 The Board should have a procedure for directors, eitherindividually or as a group, in the furtherance of their duties,to take independent professional advice, if necessary, at thecompany’s expense.




See page 15Mechanisms forProviding Leadership andManagement Interaction

See page 16Frequency and ConductOf Meetings



See page 17Frequency and ConductOf Meetings

See page 19Director’s Access toIndependentProfessional Advice

48

See page 19Director’s Access toIndependentProfessional Advice




REMUNERATION MATTERS

Procedures for Developing Remuneration Policies

Principle:7 There should be a formal and transparent procedure for fixing

the remuneration packages of individual directors. No directorshould be involved in deciding his own remuneration.

Guidance Notes:

7.1 The Board should set up a remuneration committee (“RC”)comprising a majority of non-executive directors who areindependent of Management and free from any business orother relationships, which may materially interfere with theexercise of their independent judgement. This is to minimisethe risk of any potential conflict of interest.

7.2 The RC should be chaired by an independent non-executivedirector, and have at least one member who is knowledgeablein the field of executive compensation, failing which thecommittee should have access to expert advice inside and/oroutside the company.

7.3 The RC will recommend to the Board a framework of remunerationfor the Board and key executives, and to determine specificremuneration packages for each executive director and theCEO (or executive of equivalent rank) if the CEO is not anexecutive director. The committee’s recommendations shouldbe made in consultation with the chairman of the Board andsubmitted for endorsement by the entire Board. The committeeshould cover all aspects of remuneration, including but notlimited to director’s fees, salaries, allowances, bonuses, options,and benefits in kind.

Level and Mix of Remuneration

Principle:

8 The level of remuneration should be appropriate to attract, retainand motivate the directors needed to run the company successfullybut companies should avoid paying more for this purpose.A proportion of the remuneration, especially that of executivedirectors, should be linked to performance.

Guidance Notes:

8.1 In setting remuneration packages, the company should be awareof pay and employment conditions within the industry and incomparable companies. The remuneration packages shouldtake into account the company’s relative performance and theperformance of individual directors.

See page 22Renumeration Committee




See page 23Level, Mix and Disclosureof Renumeration


49

Code of Corporate Governance with PwC Annotations ~ Access to Information


8.2 The performance-related elements of remuneration shouldform a significant proportion of the total remunerationpackage of executive directors and should be designed toalign their interests with those of shareholders and linkrewards to corporate and individual performance. There shouldbe appropriate and meaningful measures for the purpose ofassessing executive directors’ performance.

8.3 The remuneration of non-executive directors should beappropriate to the level of contribution, taking into accountfactors such as effort and time spent, and responsibilitiesof the directors. Non-executive directors should not beover-compensated to the extent that their independence maybe compromised. The Board may, if it considers necessary,consult experts on the remuneration of non-executivedirectors. The Board should recommend the remunerationof the non-executive directors for approval at the AGM.

8.4 In the case of service contracts, there should be a fixedappointment period for all directors, after which they aresubject to re-election. In any case, service contracts shouldnot be excessively long or with onerous removal clauses.The RC should consider what compensation commitmentsthe directors’ contracts of service, if any, would entailin the event of early termination. The committee should aimto be fair and avoid rewarding poor performance.

8.5 Long-term incentive schemes, including share schemes,are generally encouraged. The RC should consider whetherdirectors should be eligible for benefits under long-termincentive schemes. The use of share schemes, includingshare option schemes, should be weighed against otherkinds of long-term incentive scheme. In normal circumstances,offers of shares or granting of options or other forms ofdeferred remuneration should vest over a period of time.The use of vesting schedules, whereby only a portion of thebenefits can be exercised each year, is also strongly encouraged.Directors should be encouraged to hold their shares beyondthe vesting period, subject to the need to finance any costsof acquisition and associated tax liability.

Disclosure on Remuneration

Principle:

9 Each company should provide clear disclosure of its remunerationpolicy, level and mix of remuneration, and the procedure forsetting remuneration, in the company’s annual report.





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Guidance Notes:

9.1 The Board should report to the shareholders each year on theremuneration of directors and at least the top five key executives(who are not also directors) of the company. This annualremuneration report should form part of, or be annexed tothe company’s annual report of its directors. It should be themain vehicle through which the company reports to shareholderson remuneration matters. The members of the RC should belisted in the report.

9.2 The report should set out the names of directors and at least thetop five key executives (who are not also directors) earningremuneration which falls within bands of S$250,000. There willbe no upper limit. Within each band, there will be a breakdown(in percentage terms) of each director’s remuneration earnedthrough base/fixed salary, variable or performance-relatedincome/bonuses, benefits in kind, and stock options grantedand other long-term incentives. Companies are, however,encouraged as best practice to fully disclose the remunerationof each individual director.

9.3 For transparency, the report should disclose the same details ofthe remuneration of employees who are immediate familymembers4 of a director or the CEO, and whose remunerationexceed S$150,000 during the year. This can be done on ano-name basis with clear indication of which director or theCEO the employee is related to.

9.4 The report should also contain details of employee shareschemes to enable their shareholders to assess the benefitsand potential cost to the companies. The important terms ofthe share schemes, including the potential size of grants,methodology of valuing stock options, exercise price of optionsthat were granted as well as outstanding, whether the exerciseprice was at the market or otherwise on the date of grant,market price on the date of exercise, the vesting schedule,and the justifications for the terms adopted, should be disclosed.

9.5 The Board’s annual remuneration report need not be a standardterm of agenda for AGMs. The Board should, however, considereach year whether the circumstances are such that the AGMshould be invited to approve the policy set out in the report andshould minute their conclusions.





See page 36Accountability toShareholders

51

4 As defined in the Listing Manual of the Singapore Exchange to mean the spouse, child, adopted child, step-child, brother, sisterand parent.



ACCOUNTABILITY AND AUDIT

Accountability

Principle:

10 The Board is accountable to the shareholders while theManagement is accountable to the Board.

Guidance Notes:

10.1 The Board should provide the shareholders with a balancedand understandable assessment of the company’s performance,position and prospects on a quarterly basis. This responsibilityextends to interim and other price sensitive public reports,and reports to regulators (if required).

10.2 The Management should provide all members of the Boardwith a balanced and understandable management accountsof the company’s performance, position and prospects on amonthly basis.

Audit Committee

Principle:

11 The Board should establish an Audit Committee (“AC”)with written terms of reference which clearly set out itsauthority and duties.

Guidance Notes:

11.1 The AC should comprise at least three directors, allnon-executive, the majority of whom, including thechairman, should be independent.

11.2 The Board should ensure that the members of the AC areappropriately qualified to discharge their responsibilities.At least two members should have accounting or relatedfinancial management expertise or experience, as theBoard interprets such qualification in its business judgement.

11.3 The AC should have explicit authority to investigate anymatter within its terms of reference, full access to andco-operation by Management and full discretion to inviteany director or executive officer to attend its meetings,and reasonable resources to enable it to discharge itsfunctions properly.

11.4 The duties of the AC should include keeping under reviewthe scope and results of the audit and its cost effectivenessand the independence and objectivity of the external

See page 26Establishments ofSystems and Disclosure

See page 36Reporting to Shareholders


See page 28Audit Committee

See page 29Membership of theAudit Committee

See page 29Membership of theAudit Committee

See page 30Roles and Responsibilities ofthe Audit Committee


52



auditors. Where the auditors also supply a substantialvolume of non-audit services to the company, the committeeshould keep the nature and extent of such servicesunder review, seeking to balance the maintenance ofobjectivity and value for money.

11.5 The AC should meet with the external auditors, and withthe internal auditors, without the presence of the company’sManagement, at least annually.

11.6 The AC should review the independence of the externalauditors annually.

11.7 The Board should disclose the names of the members ofthe AC, details of the Committee’s activities, the numberof Committee meetings held in that year, and the attendanceof individual directors at such meetings in the company’sannual report.

Internal Controls

Principle:

12 The Board should ensure that the Management maintains asound system of internal controls to safeguard the shareholders’investments and the company’s assets.

Guidance Notes:

12.1 The AC should ensure that a review of the effectiveness ofthe company’s material internal controls, including financial,operational and compliance controls, and risk management,is conducted at least annually. Such review can be carriedout by the internal and/or external auditors.

12.2 The Board should comment on the adequacy of the internalcontrols in the company’s annual report.

Internal Audit

Principle:13 The company should establish an internal audit function that

is independent of the activities it audits.

Guidance Notes:

13.1 The Internal Auditor’s primary line of reporting should be tothe chairman of the AC although the Internal Auditor wouldalso report administratively to the CEO.

See page 32Audit Committee Meetingsand Agenda



See page 33Internal Control

See page 33Internal Control


See page 34Internal Audit


53



13.2 The Internal Auditor should meet or exceed the standards setby nationally or internationally recognised professionalbodies including the Standards for the Professional Practiceof Internal Auditing set by The Institute of Internal Auditors.

13.3 The AC should ensure that the internal audit function isadequately resourced and has appropriate standing withinthe company. For the avoidance of doubt, the internal auditfunction can either be in-house, outsourced to a reputableaccounting/auditing firm, or performed by a major shareholder,holding company, parent company or controlling enterprisewith an internal audit staff.

13.4 The AC should, at least annually, ensure the adequacy of theinternal audit function.

COMMUNICATION WITH SHAREHOLDERS

Principle:

14 Companies should engage in regular, effective and faircommunication with shareholders.

Guidance Notes:

14.1 Companies should regularly convey pertinent information,gather views or inputs, and address shareholders’ concerns.In disclosing information, companies should be asdescriptive, detailed and forthcoming as possible, andavoid boilerplate disclosures.

14.2 Companies should disclose information on a timely basis.Where there is inadvertent disclosure made to a selectedgroup, companies should make the same disclosure publiclyto all others as soon as practicable. This could be throughthe use of modern technology such as Internet websites.

Principle:15 Companies should encourage greater shareholder participation

at AGMs, and allow shareholders the opportunity to communicatetheir views on various matters affecting the company.

Guidance Notes:

15.1 Shareholders should have the opportunity to participateeffectively and to vote in AGMs. They should be allowed tovote in person or in absentia, and equal effect should be

See page 36Reporting to Shareholders

See page 36Accountabilityto Shareholders

See page 38Meetings with Shareholders

See page 24Disclosure and Transparency

See page 36Accountability toShare holders

See page 26Establishment of Systemsand Disclosures


See page 31Roles and Responsibilitiesof the Audit Committee



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given to votes whether cast in person or in absentia. In thisregard, companies are encouraged to make the appropriateprovisions in their articles of association to allow for absentiavoting methods such as by mail, email, fax, etc, if theshareholders so consent.

15.2 There should be separate resolutions at general meetings oneach distinct issue.

15.3 The chairpersons of the audit, nomination and/or remunerationcommittees should be present and available to addressquestions at general meetings. The external auditors shouldalso be present to assist the directors in addressing anyrelevant queries by shareholders.



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APPENDIX 4 - PAST CORPORATE GOVERNANCE INITIATIVES AND FUTURE OUTLOOK

In late 1996, the Stock Exchange of Singapore (now known as the Singapore Exchange) introducedChapter 9B on Corporate Governance in its Listing Manual with the objective of raising the standard ofcorporate governance in listed companies. Chapter 9B sets out the Exchange’s requirements governing,among other things, the establishment and membership of the Audit Committee, the role and duties ofthe Audit Committee, and the audit of listed companies, their subsidiaries and associated companies.

In October 1997, Price Waterhouse (now known as PricewaterhouseCoopers), in conjunction withthe Stock Exchange of Singapore, conducted a survey of Corporate Governance of Singapore ListedCompanies. This survey, which was sent to all listed companies in Singapore, looked at the standards ofcorporate governance in Singapore, the response of businesses to those standards and areas for possibleimprovement. The overall conclusion was that corporate governance in Singapore is regarded assatisfactory in terms of both regulation and compliance, but there were areas to be improved, especiallyin terms of clarification of roles and responsibilities of directors.

In December 1997, in an all-out bid to revamp Singapore’s financial sector, the Financial Sector ReviewGroup chaired by Deputy Prime Minister Lee Hsien Loong formed the Corporate Finance Committeewhose objectives included improving the efficiency of the corporate fund-raising process in Singaporeand standards of corporate disclosure.

The Corporate Finance Committee submitted its final report with the key recommendation that Singaporeshould shift from a merit-based regulatory system to a predominantly disclosure-based regime, so as topromote innovation, entrepreneurship, efficiency and business flexibility, while protecting the integrityof the securities market. A disclosure-based system allows investors to judge the commercial merits oftransactions. It also gives companies and market intermediaries more flexibility in conducting theirbusinesses and fund-raising activities, leading to greater financial innovation and investment choice.

In May 1998, following consultation with the listed companies and the Corporate Finance Committee,and taking into account developments in corporate governance practices in international markets, theSingapore Exchange replaced Chapter 9B with a Best Practices Guide such that each listed companyis required to adopt and disclose its own corporate governance system that best suits its particularcircumstances. Compliance with the principles and best practices set out in the Best Practices Guideis encouraged, but not mandatory.

In July 1998, the Singapore Institute of Directors (SID) was set up to represent directors’ interests andto act as the national association of company directors. The SID’s mission is “to promote high standardsof corporate governance through education and training and upholding the highest standard of professionaland ethical conduct of directors”. To this end, the SID published its Directors’ Code of ProfessionalConduct, to ensure that all directors are committed to achieving the highest level of professionalismand integrity in the discharge of their office. The further aid its members, the SID also released aDirectors’ Handbook in December 2000.

In December 1999, the Minister of Finance, together with the Monetary Authority of Singapore andthe Attorney-General’s Chambers, set up three private sector-led committees to review the corporateregulatory framework, disclosure standards and corporate governance in Singapore. One of thecommittees, the Committee on Corporate Governance, reviewed the development and promotion ofbest practices in corporate governance, examined how to adopt international best practice benchmarksin Singapore, and made their final recommendations and report in March 2001. In line with the

Past Corporate Governance Initiatives and Future Outlook


56

recommendations of this committee, the Singapore Exchange revised its listing Manual, requiring allListed companies to disclose their corporate governance practices and give explanations for deviationsfrom the code in their annual reports for general meetings held from 1 January 2003 onwards.

In March 2000, the results of the PricewaterhouseCoopers Corporate Governance Survey of InstitutionalInvestors indicated the need to continuously improve the standard of corporate governance, so as toprovide a conducive climate to the orderly development of our capital market and to meet the increasingexpectations of investors. More recently, PricewaterhouseCoopers’ fifth annual Global CEO surveyreleased in January 2002 reported that corporate governance and transparency issues continue togrow in priority for Asian chief executives. The survey found that 76 percent of Asian CEOs considercorporate governance to be a key factor in attracting foreign capital and investments, and another eightin 10 view corporate governance to be an important consideration when selecting business partners.

There are independent indicators to show that the awareness and growing recognition of this subjectin the Singapore market place is strong. For example, the Business Times launched its CorporateTransparency Index in July 2000, as a basis of measuring and assessing the level of disclosure infinancial results released by listed companies. In addition, from January 2001, the joint organisersof the Annual Reports Award presentation introduced a new category for “Best CorporateGovernance Report”.

Past Corporate Governance Initiatives and Future Outlook


57

APPENDIX 5 - S ID DIRECTORS’ CODE OF CONDUCT

(Reproduced with kind permission from the Singapore Institute of Directors)

Code of Professional Conduct

The Directors’ Code of Professional Conduct incorporates the values adopted by the Singapore Instituteof Directors (SID), and has been published to ensure that all directors are committed to achieving thehighest level of professionalism and integrity in the discharge of their office.

This Code is intended to complement the Code of Corporate Governance which the Committee onCorporate Governance, a private sector led committee, had recommended. Whereas the Code ofCorporate Governance sets out principles of corporate governance to be observed by listed companies,this Code amplifies the standards of ethics which should be adopted by individual directors in orderto bring about the highest standards of conduct in the discharge of their office.

This Code embraces the values of honesty, integrity, personal excellence and accountability whichshould be the cornerstone of directors’ conduct.

Professionalism

A1 General

Principle

• It shall be the responsibility of a director to ensure that he has the relevant knowledge to carryout and discharge responsibly his duties as a director. He shall keep abreast of developmentsthrough continuing education. He must strive to improve and maintain his competence asa director.

• It shall be the responsibility of a director to fully understand the undertakings of the companyhe serves. A director must be fully apprised of the affairs, business and operations of the company,and should take such steps as are required or necessary to this end.

• A director shall endeavour to ensure compliance by the company with the Code ofCorporate Governance.

B1 Due Diligence

Principle

• A director shall act with due diligence in the discharge of his office of director.

Guidance Notes

• A director should seek to assist the board in constantly improving the management of the companyso as to protect and enhance the interests of shareholders.

• A director should endeavour to attend all board meetings of the company and participate fullyin its deliberations. Where attendance at any meeting is not possible, appropriate steps shouldbe taken to obtain leave of absence. The director shall ensure that he does not over-extendhimself by accepting too many directorships which prevents him from properly discharginghis duties to any company.

SID Directors’ Code of Conduct


58

B2 Honesty

Principle

• A director shall at all times act honestly, in good faith and in the best interest of the company.

Guidance Notes

A director shall maintain and exercise independence in his judgment at all times,

• and should take reasonable steps to be satisfied as to the soundness of all decisions taken bythe board of directors.

• The director must at all times avoid being in a position where his independence is compromised.• A director, who is appointed to a board at the nomination of a major shareholder or a creditor,

should recognise the particular sensitivity of the position. Fiduciary duty requires the directorto make a contribution in the interests of the company and the shareholders as a whole and notonly in the interest of the nominator. Where obligations to other people or bodies preclude anindependent position on an issue the director should disclose the position and seriouslyconsider whether to be absent or refrain from participating in the Board’s consideration ofthe issue. The matter should be disclosed to and resolved by the rest of the Board.

B3 Conflict of Interest

Principle

• A director shall maintain transparency at all times and avoid placing himself in a position ofconflict that may arise in any respect. He shall disclose immediately all contractual interestwhether directly or indirectly with the company.

• A director must not take improper advantage of his position. Specifically, he shall keep allinformation acquired as a director confidential and not make improper use of such information.

Guidance Notes

• A director must not take improper advantage of his position to gain, directly or indirectly, apersonal advantage or an advantage for any Associated Person, which may cause detrimentto the company. An Associated Person includes any spouse, parent, child or sibling of thedirector or any company, corporation, partnership, trust or other entity owned or controlledby the director or in which the director has substantial personal interest.

• The personal interests of a director, and those of the director’s Associated Persons must not beallowed to prevail over those of the company’s shareholders generally. A director should seekto avoid conflicts of interest wherever possible. Full disclosure of any conflict, or potentialconflict, must be made to the board. In considering these issues, account should be taken ofthe significance of the potential conflict for the company and the possible consequences if itis not handled properly.

• Where conflict does arise, a director must consider whether to refrain from participating inthe debate and/or voting on the matter, whether to be absent from discussion of the matter,whether to arrange that the relevant board papers are not sent to him, or, in an extreme case,whether to resign from the board. Where a director chooses to be absent from the meeting,consideration should be given as to whether expertise that would be contributed by the directoris otherwise available. In the case of a continuing material conflict of interest, a director shouldgive careful consideration to resigning from the board.



59

• A director should consider whether any benefit to be received by the director or an AssociatedPerson is of sufficient magnitude that the approval of the shareholders should be sought, eventhough not required by law.

• A director must not make improper use of information acquired by virtue of his position.This prohibition applies irrespective of whether the director would gain directly or indirectlya personal advantage or an advantage for any Associated Person or might cause detriment tothe company.

• A director must adhere to all rules and regulations relating to the buying and selling of sharesin his company and must comply additionally with such guidelines as may be prescribed bythe board of directors on the trading of shares. A director should not deal in his company’ssecurities on short-term considerations.

• A director should ensure that any information which is not publicly available and which wouldhave a material effect on the price or value of the company’s securities is not provided toanyone who may be influenced to subscribe for, buy or sell shares.

B4 Compliance with Laws

Principle

• A director shall take all necessary steps to ensure that he and the company he serves observeall laws and rules governing its operation.

Guidance Notes

• A director must acquire knowledge about the regulatory and legal context in which thecompany operates.

• A director should where necessary obtain legal, financial or other professional advice on thecompany’s affairs or in respect of his fiduciary or other duties. Where necessary, such advicemay have to be obtained from advisors independent of those advising the company. There shouldbe an agreed procedure for directors in the furtherance of their duties to take such independentprofessional advice, if necessary, at the company’s expense.

B5 Access to Information

Principle

• A director shall insist on being kept informed, on a timely basis, of all-important developmentsin the company he serves.

Guidance Notes

• A director must be at the forefront of the decision-making process. He must always be apprisedof the company’s progress to be an effective director.

• A director should insist on access to complete, adequate and timely information. This informationshould be made available to directors in sufficient time to allow proper consideration of allrelevant issues. Where information is not provided, the director should make an appropriateprotest about the failure on the part of the management to provide the information and ifnecessary, abstain from voting on the particular matter on the basis that there has not been the



60

time necessary to consider the matter properly. Any abstention, and the reasons for it, should beincluded in the minutes. It may be appropriate to vote against the motion or move for defermentuntil proper information is available.

C1 Personal Standards

Principle

• A director shall set and maintain high personal standards by honouring and promoting theCode and encouraging other directors in its observance.

• A director shall apply this Code in all circumstances. The Code should be a reflection of adirector’s personal values.



Copyrights 2001 SID. All rights reserved. Terms & Conditions.2 Finlayson Green #07-01/02 Asia Insurance Building Singapore 049247 Tel: (65) 6227 2838, Fax: (65) 6227 9186

61

PART 5


ABOUT PRICEWATERHOUSECOOPERS SINGAPORE

PricewaterhouseCoopers Singapore is a member firm of the world-wide PricewaterhouseCoopers(www.pwcglobal.com) organisation, the world’s largest professional services organisation. Drawingon the knowledge and skills of more than 150,000 people in 150 countries, we help our clients solvecomplex business problems and measurably enhance their ability to build value, manage risk andimprove performance in an Internet-enabled world.

With 65 partners and some 1,600 staff members, PricewaterhouseCoopers is a leading professionalservices firm in Singapore. We count among our clients, many blue-chip multinationals, as well astop-tier local companies. We audit the largest number of top 50 companies listed on the SingaporeExchange (SGX) in terms of market capitalisation, and we have a proven track record in auditingstatutory boards and government-linked companies.

PricewaterhouseCoopers has global revenues of US$22.3 (S$41) billion for the fiscal year ended30 June 2001, a 7.6% increase over the previous year’s revenue of US$20.7 (S$38) billion.

Corporate Governance Related Services

PricewaterhouseCoopers has helped many organisations put in place the necessary systems inpreparation of the implementation of the Singapore Code on Corporate Governance.

Our corporate governance services entails the following phases:

• Phase 1 - ascertaining the current status of CG initiatives (gap analysis with recommendations);

• Phase 2 - aligning existing policies and terms of references; and• Phase 3 - positioning existing frameworks to support CG practices and principles.

Other Services

a) Assurance and Business Advisory Services

• Audit - statutory and regulatory audit.

• Global Risk Management Solutions - helping organisations manage strategic, financial,compliance, and operational and systems risks.

• Internal audit services

• Transaction support services

b) Tax & Legal Services

Helping corporates and individuals with tax strategy, planning and compliance.

About PricewaterhouseCoopers Singapore62


About PricewaterhouseCoopers Singapore

c) Corporate Finance & Recovery

• Corporate Finance Services

• Business Recovery Services/Dispute Analysis & Investigations

d) Human Resources Consulting

Providing an array of integrated human resources (HR) solutions, including executive recruitment,management, compensation, taxation, and retirement or severance.

e) Business Process Outsourcing

Through affiliate firms Evatthouse Corporate Services Pte Ltd, Barbinder & Co. Pte Ltd andOutsource Centre Pte Ltd, we offer a range of BPO services, including corporate secretarial services,unit trust registry and fund administration services, accounting services, executive support, trustadministration and payroll administration.

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