Will Singapore shareholders get their say on pay?

Will Singapore shareholders get their say on pay?

SINGAPORE investors could soon have a greater say on how much the executives of listed companies here get paid; but whether this is necessarily a good thing remains to be seen.

Global advisory firm Willis Towers Watson believes that Say-On-Pay is an inevitable development for the Singapore market - one driven not just by global trends but also by domestic needs.

Say-On-Pay is commonly defined as the ability of shareholders of a company to vote on how and how much executives of the company get compensated. In essence, it divests the power to decide executive remuneration away from the companies and into the hands of investors.

It ranges from binding votes, adopted by jurisdictions such as the United Kingdom, to non-binding, or advisory, votes, seen in the United States. Binding votes allow shareholders a legally binding vote on executive remuneration resolutions, including the company's remuneration framework and targets for the coming year. Advisory votes have shareholders voting on remuneration-related resolutions, merely to express their level of satisfaction with such practices; their votes do not compel the company to act.

Singapore has neither of these systems, nor any form of Say-On-Pay. It adopts a "comply or explain" approach to executive compensation.

The Corporate Governance Code here says that listed companies should disclose, in their annual report, the exact remuneration of each individual director and the CEO, and the remuneration of the top five key management personnel who are not also directors or the CEO in bands of $250,000. It also says companies should disclose information on the link between remuneration paid and performance.

Companies are expected to comply with these guidelines, and - as per Singapore Exchange (SGX) listing rules - to explain any deviation in compliance.

Kevin Ong, director of Executive Compensation Southeast Asia at Willis Towers Watson, believes Singapore's comply-or-explain approach leaves much to be desired. He cites the Singapore Institute of Directors (SID) and SGX Board of Directors Survey 2015, which showed that 55 per cent of companies are still not disclosing remuneration details as recommended by the Code.

"In my discussion with SID members, our view is that the Code does not have teeth. Singapore companies, when talking about pay in their annual report, don't (usually) disclose pay versus performance. They typically have some boilerplate answer. (And) they hide behind reasons of confidentiality," he says.

"With more stringent requirements on pay disclosure, the bigger companies will have to disclose how they pay versus performance.

"We're not saying Say-On-Pay is a must, but Say-On-Pay is one of the things we must seriously consider."

What also needs to be considered is that Say-On-Pay has had both positive and negative consequences.

Mark Reid, Willis Towers Watson's global head of Executive Compensation, says: "It gives disclosure more bite. If shareholders are unhappy with the pay practices that are being disclosed or the detail of disclosure itself - the way it's disclosed - then it gives them more power to express their dissatisfaction."

Say-On-Pay has controlled inflation in countries such as the UK because companies need shareholder permission even to effect a pay increase. In other jurisdictions, the increased disclosure on executive remuneration has had the opposite effect - raising pay levels across the board.

Say-On-Pay has increased shareholders' ability to control the link between pay and performance. It has also meant greater shareholder engagement on the part of companies, but also greater time commitment on the part of the remuneration committee chairman.

Some less than ideal, and unintended, consequences has been a growing conservatism in pay practices, particularly among smaller companies. "If you haven't the time and resources to engage with shareholders, you typically just come up with the pay package that won't get you into trouble, and you all land up having the same thing. Which isn't necessarily a good outcome. You want pay programmes that will drive strategy and performance. Instead, you get a phase when everyone huddles together for safety because no one wants to be an outlier," Mr Reid observes.

He also points out that Say-On-Pay has vested a lot of the voting power into the hands of proxy agencies like ISS or Glass Lewis. "Their voting recommendations are followed by a lot of investors. That's been multiplied recently in the West, because shareholdings have become a lot more international. We see BlackRock or Fidelity investing globally and they might not know what the best practices are there. So, they might outsource the voting recommendation to these proxy agencies. I think, right now, the pendulum has swung too far and the agencies have gotten very powerful and there aren't enough agencies to provide a diverse point of view, so it's driven too much power into one point of view."

As to whether Singapore should adopt Say-On-Pay, Mr Reid says it isn't necessary - for now. "You could argue that the first step is to move away from a comply-or-explain approach to a more legalistic framework (instead, wherein listing rules and the law could mandate pay practices and greater disclosure)."

Still, he adds, "disclosure breeds more disclosure".

"Once you've opened the Pando-ra's box, everyone wants more - 'you've told us this, but you haven't told us this'. So, it's definitely a one-way street. Once you've accepted the idea of detailed disclosure, Say-On-Pay is inevitable.

"You're probably five to 10 years away from needing it."

If it comes to that, Singapore will likely adopt advisory votes before considering having binding votes. "You would have to do that because neither the corporations nor the shareholders will be sufficiently staffed or experienced to deal with a heavy-duty Say-On-Pay," Mr Reid says.

Mr Ong adds: "Say-On-Pay, if it has to come, has to be managed carefully. Say-On-Pay is not necessarily a bad thing for Singapore. When it comes, people have to be educated on what it means, what it's meant for. And smaller companies might have to be exempted or given a longer time frame to comply."

michquah@sph.com.sg


This article was first published on May 5, 2016.
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