Promoting better governance in Asia

SINGAPORE has come out tops in terms of corporate governance (CG) standards in the Asia-Pacific, and is in a good position to support its neighbours in this area when a single ASEAN market becomes a reality next year.

A joint study by the Association of Chartered Certified Accountants (ACCA) and KPMG in Singapore analysed CG requirements in terms of the clarity, degree of enforceability and numberand type of instruments used by the different markets.

Titled Balancing Rulesand Flexibility, it ranked 25 countries globally based on these criteria, with Singapore coming in third behind the United Kingdom and the United States. It also found a wide disparity in CG requirements across the different markets it studied.

It noted that recent revisions to the corporate governance code and the Singapore Exchange (SGX) Listing Rules, particularly in the areas of assurance, audit committees, disclosures and risk governance, have enhanced the CG landscape in the Republic. "We hope this study can contribute to raising the standard of corporate governance requirements globally.

Given the disparity in corporate governance requirements across the markets we have studied, there is still a long journey ahead of us," said Irving Low, head of risk consulting at KPMG in Singapore, who spearheaded the study.

He added: "Implementing corporate governance well will also prepare companies for the opportunities that come with the anticipated high growthrates of the Aseaneconomies."

With ASEAN poised to converge into one market next year, he urged Singapore to take the lead in supporting other South-east Asian nations to boost their governance standards.

Unsurprisingly, the study found thatdeveloped marketshadbetterdefined requirements than its developing counterparts, with six out of the top 10 highest scoring markets in the developed category.

On the flip side, the report noted that developing economies could use well-established governance standards to help build confidence in their capital markets. Indeed, emerging markets such as India, Malaysia, Russia and Brazil received scores that were higher than the average for developed markets.

However, Mr Low stressed that a low score does not necessarily indicate poor governance standards, but rather that such requirements are not reflected in the actual corporate governance code of the market. However, they could be present in other CG instruments.

The study also called for governments to work towards meeting global CG requirements based on the Organisation for Economic Co-operation and Development (OECD) principles.

"Corporate governance codes have a central role to play in defining acceptable practices and in directing behaviour.

The OECD Principles of Corporate Governance enable countries to adopt and reflect a widely accepted benchmark when designing their own codes and instruments," said Sue Almond, ACCA's director of external affairs, in the report.

Room for improvement Despite its strong showing, Singapore cannot afford to be complacent, with little distinguishing the Republic from countries such as Australia, India and Malaysia, said Mr Low.

"Singapore's corporate governance requirements for listed companies have scored relatively well but these requirementsare predominantlyprinciples- based. While we did not examine levels of adoption, KPMG's experience with clients suggests that there are still challenges adopting corporate governance requirements in practice," he said.

Principles-based standards do not require mandatory compliance with requirements. Instead, companies either volunteer to comply or follow a "comply or explain" system that requires them to explain why they have not complied with certain requirements.

Leong Soo Yee, head, ACCA Singapore, believed that there were still areas for improvement despite the country scoring well across most of the governance areas measured.

These include strengthening requirements in relation to documenting the role of the board, optimising board diversity and skill sets, disclosing codes of conduct, formalising board performance evaluations and disclosing more in relation to stakeholder engagement and CSR reporting, she said.

To encourage better adoption of governance standards, tone from the top was critical, argued ACCA's Ms Almond.

She said: "Codesandenforcements are not enough though. The desire of organisations to channel and nurture corporate behaviours that drive and support good governance practices are paramount. Tone from the top is key, and ultimately, it is employees that make the words of a code resonate and actually mean something."

Delivering sustainable value Ultimately, boosting CG standards is critical in supporting boards and management to navigate uncertainty and deliver long-term sustainable value to shareholders and stakeholders, said Mr Low.

"When implemented well, it builds confidence in capital markets. This is particularly important given the anticipated growth rates in many emerging and developing economies. However, poor corporate governance is often cited as a key contributing factor in corporate collapses and large scale financial crises."

Ms Almond noted that good governance affects not just shareholders, but also a broader group of stakeholders, including politicians, managers, employees, financial market regulators and members of society.

She said: "There is an undeniable interconnectedness between business operations and society, increasing regulatory complexity and growing shareholder activity."

Key findings in the report

THE joint study, Balancing Rules and Flexibility, by ACCA and KPMG in Singapore was prepared over 14 months to examine the similarities and differences of CG requirements across a selection of global markets. The report was unveiled in Singapore last week.

Specifically the report sought to:

- Examine corporate governance (CG) requirements in terms of clarity and completeness of content, degree of enforceability and prevalence;

- Identify common/basicCGrequirements and emerging trends;

- Raise awareness of the similarities and differences in CG requirements across markets, geographic regions, economic zones and pillars/themes of CG; and

- Inform other industry research, such as the Organisation for Economic Cooperation and Development (OECD) Principles Review.

This study focuses on the governance requirements only and has not reviewed levels of compliance or outcomes by companies with respect to the various requirements.

Significant issues

Here is a selection of the report's key findings:

CG Codes provide clarity but is not a "one-stop-shop" for corporate governance requirements

Some 22 out of 25 markets in this study have a CG Code or its equivalent in place.CGCodes provide an efficient and effective manner to clarify the CG requirements within a market. However, reviewing the CG Codein isolation from theCGlandscape - such asCompanies Act, Listing Rules or better practice guidelines - may not be adequate.

Multiple instruments can lead to inconsistencies and misalignment between requirements

While utilising multiple CG instruments to specify CG requirements enables markets to capture more details and explanations to clarify requirements, there is also a risk that requirements may be inconsistent and could lead to sub-optimal implementation of requirements.

 Some markets have not kept pace with significant developments in CG requirements

While regulators and policy makers aim to proactively identify areas for improvement in their respective CG landscapes, a large portion of developments arise from learning and outcomes from significant external events, such as significant corporate collapses or financial systems crises.

Well-defined CG requirements are a critical factor in building confidence in capital markets

The study found that, overall, developed markets received higher scores on average than developing markets regarding the clarity and completeness of CG requirements in relation to the research framework elements.

Well-defined CG requirements on paper may lack enforceability in practice

While all markets mandate elements of CG, the degree to which they are supplemented by principles or better practices varies. Overall the study found that 56 per cent of the 1,800 requirements reviewed were principles based with the remaining 44 per cent of requirements mandatory in nature.

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