EditorsDr Belaid Rettab, Dubai Chamber, Centre for Responsible Business

Vineetha Mathew, Dubai Chamber, Centre for Responsible Business

ContributorsH.E. Hisham Shirawi, Vice Chairman, Dubai Chamber of Commerce & Industry

Paul Koster, CEO, DFSA

Christy Woods, Chairman, ICGN Board of Governors

Dr. Peter Eigen, Founder of Transparency International and Member of Advisory Council, Humboldt Viadrina School of Governance, Germany

David Crackett, Vice President - Council of British Chambers of Commerce in Europe

Mahmood Ali Hussain Ahmad, Vice President - Board Relations, Corporate Governance and Compliance, du

Yumiko Yamashita, Program Officer, Industry Department Asian Productivity Organization (APO)

Wolfgang Braun, Head of Energy Transmission, Siemens Middle East

Mak Yuen Teen, Associate Professor of Accounting at the NUS Business School

This paper is published by Dubai Chamber Centre for Responsible Business (CRB). All content is for informational purposes only and not to be construed as a guaranteed outcome. CRB cannot accept responsibility for any errors or omissions or any liability resulting from the use or misuse of any such information.

© 2011 Dubai Chamber Centre for Responsible Business. All rights reserved.

This publication may not be reproduced, stored in a retrieval system, or transmitted in whole or in part or by any means, electronic, mechanical, photocopied, recorded or otherwise, without prior written permission from Dubai Chamber Centre for Responsible Business. Quoting portions or all of this work is permissible using the following citation:

CRB, 2011.Dubai Dialogue: Corporate Governance 2011 Conference Proceedings Paper. Dubai Chamber Centre for Responsible Business. Dubai, UAE

Table of Contents

Foreword ..........................................................................................................

Agenda for the Conference ..............................................................................

Welcome Speech .............................................................................................

Role of Regulation, Corporates and the Marketplace ......................................

Lacunae and Challenges in Current Corporate Governance Practices ...........

Prerequisites of Good Corporate Governance .................................................

Impact of Corporate Governance on Value of the Firm ...................................

Corporate Governance in the pursuit of Productivity ......................................

Enhancement for the Asia-Pacific

Roles and Responsibilities of Boards in Managing Future Risks .....................

Corporate Governance: The Singapore Journey .............................................

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Foreword

Corporate Governance has wide implications for sustainable development. Corporate Governance underpins market confidence, integrity and efficiency, and hence promotes economic growth and financial stability. While on one hand, it brings about incentives to achieve business success and sustain this through accountability and transparency and subsequently ensures long term competitive advantage for the business. On the other, Good Corporate Governance requires reliable disclosure mechanisms to ensure social performance and acceptance by society. The benefit of corporate governance stems from the effective integration of leadership, risk and process management control, and compliance into a single coherent and consistent business strategy to ensure long-term value creation. The current global financial crisis has led to debates on existing approaches of corporate governance. Business leaders have come under intense pressure and scrutiny by stakeholders. The latter have lost confidence as huge gaps materialized between stakeholder’s expectations, actual performance and management practices. Stakeholders and society at large demand fairer practice in sharing the values generated, prevention of misuse of powers and more systematic accountability by managers. There is a growing consensus amongst stakeholders that business as usual is no longer acceptable. Businesses are required to focus on achieving long term goals based on transparent and accountable practices instead of opting for short term business goals and strategies. Traditionally, Corporate Governance has focused on legal and risk issues, succession, finances, management structures, individual competencies, leadership and independence. Yet today’s corporate governance demands higher global outreach of businesses and governance beyond the practice of compliance with national legal requirements, where global competence and competitive advantage are crucial to achieve global reputation and sustainability of the firm. The Dubai Dialogue is a biannual international conference which provides a platform for business leaders from the UAE’s private and public sectors looking to gain an in depth understanding of the state of corporate governance globally. The conference examined shortcomings in Corporate Governance practices worldwide and outlined challenges and promising features of excellence in Corporate Governance.

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This conference provided insights on how to adopt measurable and progressive governance models and mechanisms that can lead to organisational excellence and long term sustainability. Speakers also examined the importance of regulatory frameworks in establishing corporate governance guidelines and frameworks. This Dubai Dialogue Conference on Corporate Governance is the fifth of its kind to be organised by Dubai Chamber CRB. The great success of this series of conferences has demonstrated the strong need amongst the business community and the public sector for such dialogue and Dubai Chamber’s commitment to keep providing high value services and platforms for dialogue.

Agenda

08.30 - 09.00 am Registration and Networking

09.00 - 09.15 am Welcome Speech H.E. Hisham Al Shirawi Vice Chairman, Dubai Chamber of Commerce & Industry

Session 1: Corporate Governance and the Current Financial Turmoil

09.15 - 09.45 am Role of Regulation, Corporates and the Marketplace Paul Koster CEO, DFSA

09.45 - 010.15 am Lacunae and Challenges in Current Corporate Governance Practices

Christy Wood Chairman, ICGN Board of Governors

10.15 - 10.45 am Consequence of the Trade-off between Short Term versus Long Term Business Strategies

Dr. Peter Eigen Founder of Transparency International and Member of Advisory

Council, Humboldt Viadrina School of Governance, Germany

10.45 - 11.00 am Q & A Dr. Belaid Rettab Dubai Chamber of Commerce & Industry

Paul Koster DFSA

Christy Wood CGN Board of Governors

Dr. Peter Eigen Transparency International

11.00 - 11.15 am Tea/Coffee Break

Session 2: Corporate Governance A Driver for Sustainability

11.15 - 11.45 am Prerequisites of Good Corporate Governance to meet the Challenging Market Expectations

David Crackett Vice President, Council of British Chambers of Commerce in

Europe

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11.45 - 12.15 am Impact of Corporate Governance on Value of the Firm Mahmood Ali Hussain Ahmad Vice President, Board Relations, Corporate Governance and

Compliance, Du

12.15 - 12.30 pm Q & A David Crackett Council of British Chambers of Commerce in Europe Mahmood Ali Hussain Ahmad Du

12.30 - 12.50 pm Dubai Chamber CSR Label Ceremony

12.50 - 02.00 pm Networking Luncheon

Session 3: Best Practices in Corporate Governance

02.00 - 02.25 pm Impact of Corporate Governance on Productivity- Asian Experience

Yumiko Yamashita Program Officer, Industry Department, Asian Productivity

Organization (APO)

02.25 - 02.50 pm Roles and Responsibilities of Boards in Managing Future Risks

Wolfgang Braun Head of Energy Transmission, Siemens Middle East

02.50 - 03.15 pm Role of Corporate Governance in delivering Excellence in Singapore

Mak Yuen Teen Associate Professor of Accounting at the NUS Business School

03.15 - 03.30 pm Q & A Yumiko Yamashita Asian Productivity Organization (APO)

Wolfgang Braun Siemens Middle East

Mak Yuen Teen NUS Business School

03.30 pm Summary and Concluding Remarks Dr. Belaid Rettab Senior Director Economic Research and Sustainable Business

Development Sector, Dubai Chamber

Welcome Speech

It is a pleasure to welcome you to the second Dubai Dialogue of 2011, the UAE’s largest annual corporate conference for the business community.

Today’s international conference will provide an appropriate platform for business leaders from private and public sectors to gain an in depth understanding of the state of corporate governance regionally and globally.

As corporate governance continues to be an area of focus for most companies, there are many questions and issues that businesses are still struggling with: What is good corporate governance and why is it so important? What are those evidenced mechanisms and best practices that are useful for businesses in promoting transparency, sustainability and the confidence of investors and stakeholders?

We note that the recent global financial turmoil has for sure divulged substantial failures and market distortions, and questioned well established governance and economic systems. Subsequently, businesses in the region are now beginning to recognize that Good Corporate Governance, risk management and Corporate Social Responsibility is a pre-requisite for sustainability and competitiveness and the ultimate path to business reputation and therefore new directions for corporate governance have to be devised.

This conference will provide a thorough and systematic analysis of past experience with corporate governance; it will examine shortcomings in Corporate Governance practices worldwide as well as outline challenges and promising features to carry Corporate Governance to the next levels.

There is an expressed need among global businesses to rethink the established norms and standards, to innovate and adopt measurable and progressive governance models with the potential for organizational excellence and long term sustainability. Today’s speakers, joining us from east and west, will also examine the importance of regulatory frameworks in streamlining new directions of corporate governance.

It is generally agreed that there is a strong link between Good Governance, Business Performance and Sustainability, a relationship which has been frequently overlooked by traditional organizations and corporate system. It is key for economic sustainability to embed good governance, and align this business strategy with the organizational, environmental and social goals in order to create value for stakeholders.

Corporate Governance today demands higher global outreach by businesses and demands a new style of governance beyond the practice of compliance with national legal systems. Corporate Governance today is a core global competence and source of competitive advantage.

For the UAE, good corporate governance is a key pillar underpinning UAE’s reputation as a trusted financial and business hub. Meanwhile, significant regulatory reforms are taking place in UAE to further strengthen our governance regime. The idea is to enhance the fundamental regulatory framework supporting Dubai’s growth as an international hub for both businesses and investors.

For example, the UAE corporate governance guidelines were introduced by the Emirates Securities and Commodities Authority in 2007 and are now mandatory for listed companies. The Central Bank of UAE has also recently issued draft corporate governance guidelines for bank directors in the Emirates. Clearly, governance is increasingly being recognized by the business community and regulators as a fundamental driver of corporate performance.

As, we continue to introduce market reforms, to comply with business standards on a global scale, corporate governance, transparency, and accountability have a crucial role to play in positioning the region as a credible player of the future.

For making governance work we need to move beyond compliance to achieve higher standards. The need here is to create a corporate governance system which is based on ethics, integrity, equity, legitimacy and transparency.

The Dubai Chamber, through its Centre for Responsible Business, aims at promoting awareness, and practicing of CSR & Good Governance among Dubai’s business community. It does this through training courses, advisory services, seminars to raise awareness and various programs which are designed to increase a company’s capacity to implement broad Governance and CSR.

We launched the Dubai Chamber Sustainability Network in 2010 which brings together UAE’s top business leaders with the objective of promoting CSR leadership and internalizing corporate social responsibility best practices in the country.

The Sustainability Network consists so far of 31 high profile businesses, with a record of achievement in governance and sustainable excellence, as well as a determination to lead the business community to the next level and determine the path of sustainability for the future.

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The Dubai Chamber Sustainability Network acts to achieve these objectives through business and community engagement, initiating programs to raise awareness, promote governance best practices; engage with the media and government for buy in and regulatory support.

Dubai Chamber members which are counting about 120,000 members, are offered a platform to develop collaborations with other CSR leading companies, they are given access to learning resources and tools, like the Chamber’s CSR Label, training courses and advisory services to help them develop their own CSR strategies, and they are coached to participate in other CSR programs such as Engage Dubai, as well as Dubai Chamber’s MRM Excellence program and award.

Excellencies, dear members, ladies and gentleman, today, we are very glad to have with us an outstanding team of speakers, who join us to brief us about the latest development in the field of corporate governance in the region and worldwide. They will share with us their experiences and perspectives on corporate governance practices and their views about future directions of corporate governance. Once again thank you for joining us today. Let us continue to work towards making Dubai’s business community pioneering and responsible, but most of all sustainable.

H.E Hisham Al ShirawiVice Chairman, Dubai Chamber, UAE

Role Of Regulation, Corporates And The Marketplace

To understand the role regulation plays in corporate governance, and the role of corporates and the marketplace, we need to first ask ‘what is corporate governance’.

Corporate governance is a cohesive set of systems, policies, procedures and controls through which a corporate entity achieves sound and prudent management of the corporation, in the interests of shareholders and other stakeholders.

Corporate Governance is captured in this definition, but what does it mean?

• Direction and Control of the Company

• Checks & balances in setting direction of the Company

• Owners/investor relations/transparency to the Market.

• It is about short term/long term value decisions making process

• It is about the function, accountability and legitimacy of management.

• It is about the Board’s functioning

The starting point of good corporate governance is of course the corporation itself. It is the responsibility of the corporate entity itself to adopt and implement sound systems and structures, and policies and procedures, to be able to do its business soundly and properly (See Washington Mutual (WaMu).

Generally, there is a body of well-established company law, which is found in mo st common law and civil law jurisdictions, which sets minimum standards relating to required corporate conduct and behaviour. For example, directors’ duties, protecting minority interests, treating shareholders equally and fairly are generally standards embodied in the company law regimes.

A Director should act in good faith - that is to pursue the Corporation’s best interest. Bad faith is when “any emotion may cause a director (intentionally) to place his own interests, preferences or appetites before the welfare of the company - including greed, hatred, lust, envy, revenge. Chancellor Allen, Director, NYU Pollack Centre for Law and Business said, it is also the indifference of the Directors to their duty to protect the interests of the Company and its minority shareholders.

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To act in good faith a director must act at all times with honesty of purpose and in the best interest and welfare of the Company.

However, when a corporate entity is a provider of financial services, such as a bank, insurer, broker dealer or fund manager, the level of regulation provided by company law alone is not quite adequate to ensure sound corporate governance within such an entity. This is because corporate entities which provide financial services, such as banks, insurers, brokers and fund managers are quite different.

The very nature of their activities raises significant investor protection and systemic stability concerns, which warrant a higher level of regulation in relation to them.

For example, if a large bank were to become insolvent due to poor governance, its failure can adversely affect a large segment of the community who are depositors and investors in the bank. As we have all seen with Northern Rock and Fannie Mae, this would not only erode the personal investments but also the confidence investors have in the system. Due to the interconnectedness of the financial activities, such a failure can also adversely affect the systemic stability, not only in the jurisdiction or jurisdictions in which the bank is established or operates, but in other jurisdictions where counterparties to their transactions are located. This is why regulation of financial institutions, even more so those that we consider systemically significant, requires higher standards, amongst others, relating to their corporate governance.

A remark made in 2002 by then Chairman of Citibank, Sandy Weil would not be well received in today’s environment. Sandy Weil allegedly said just before signing off on financials in 2002 “How would I know what all my bankers are doing?!”

So, what are the corporate governance standards that are imposed through regulation which are over and above those provided in the company law? Generally, most jurisdictions, in regulating financial institutions, require financial institutions to adopt and implement a corporate governance framework that is adequate to ensure prudent and sound management of the firm, in order to ensure the firm’s long term viability and protection of its customers and other stakeholders. More detailed regulatory requirements that are needed to achieve this overarching outcome are then prescribed. These include imposing clear responsibility on the Boards of financial institutions to set business objectives and strategies of the firm, taking into account the risk profile and risk appetite of the firm, and to provide proper oversight of the management of the firm.

To explain this in detail:The two recent reports published highlight the importance of Governance and are helpful for guidance on this complicated issue:

• FSA Report on Royal Bank of Scotland (RBS); and

• Lord Woolf’s Report on London School of Economics (LSE)

Do you have appropriate formal processes of governance?

The DFSA rules say: “An Authorised Firm must have a Corporate Governance Framework as appropriate to the nature, scale and complexity of its business structures”.

Questions related to the framework are, does the framework

• Support information flows to right levels?

• Have proper procedures for setting Board agenda?

• Allow right composition of Board/Size of Board?

• Promote good Boardroom dynamics?

• Provides balanced control of Management style (aggressive or cautious)

• Promotes shared values (does the management exude interest in ethical

behaviour?)

To explore Boardroom dynamics a little bit further: Does a Board challenge enough?

• Does it question assumptions of underlying business plans? Is it strong enough to force the management to re examine assumptions of the proposed strategy?

• Is it addressing adequately but also identifying the aggregation of risks across businesses?

• How is the incentive structure? Is that conducive to good behaviour?

• What key metrics is the Executive focusing on? Are those the right ones?

• Is there contingency planning? Events are always unpredictable but prepare for worst case scenarios.

History does not repeat itself but studying history will awake you to the multiplicity of events and the fall out of events.

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Another key element is on management style and future direction:

• What is overall risk appetite? - Does the Board have a risk assessment process in place - leading to overall risk appetite that guides management?

• What/how are you dealing with a sizeable/defining acquisition/change in business model (HP selling hardware division?) given that risk profile? What is the specific responsibility of the board?

• How do you approach the Executive and avoid:» Wrong deal? » Wrong structure of deal?» Wrong price?» Wrong payment structure?» Wrong time?

Board Topics in regard to future direction:

• How effective is the Board in relation to strategy?» i.e. does it pay attention to associated risks of new direction be it acquisition;

change of business model; fundamental change in funding, etc» Are briefings to Board detailed enough, information as to how to address

various risks identified - to avoid/or mitigate.» And does Board discipline allow adequate probing of info as it presented to

them.

• Past achievement may lull a Board into complacency in regard to new proposals (it worked then: it will work now) - (NATWEST Acquisition)

• Due diligence results weighed properly? Limited due diligence means limited insight!

• What/constitute penetrating analysis of risks and who drives that - especially with RISK OF GROUP THINK!

• Do you have independent advisors?? Is his/her pay properly structured? (OLYMPUS!!!)

• Do you have the right level of industry expertise on the Board?

The CEO’s leadership capability and management style. This is a very sensitive issue especially in Family Owned Business.

Dominance of CEO

• What are the checks and balances in place?

• How is the Executive team functioning under the CEO?

• Is the CEO transgressing into the CFO’s area?

• How does pay structure affect objectivity of executive members (golden cage?) and willingness to “risk” their job?

Further, the senior management of the firm is required to undertake the day-to-day management of the firm in accordance with the objectives and strategies set or approved by the Board.

Also importantly, key control functions within a financial institution, which are an integral part of the necessary checks and balances to ensure sound corporate governance, are given a significant role. These key control functions are, of course, risk management, compliance, internal and external audit, and in the case of insurers, actuaries. The regulatory requirements require these functions to have sufficient and clear authority within the financial institution to carry out their roles effectively and without undue interference from the senior management.

In the aftermath of the financial market crisis that began in 2007, from the effects of which the global financial system has yet to recover fully, the standard setters like IOSCO, FSB and G-20 have taken a keen interest in setting higher corporate governance standards for financial institutions. This is because, as we are all aware, poor governance practices, particularly in the areas of Board control and oversight of financial institutions, and remuneration practices, are seen as having significantly contributed to some of the spectacular failures of large financial institutions, with wide ranging adverse repercussions for investors and systemic stability. So, what is the role corporates and marketplace play in corporate governance? In the case of regulated firms, regulation plays a significant part in promoting and ensuring that such firms adopt and implement necessary systems and controls relating to its governance, which are prescribed, with the DFSA’s new requirements relating to corporate governance coming into force in early 2012. Some of the key aspects of the corporate governance enhancements we have made include:

• Placing clear onus on the governing body (“board”) to set and approve the business objectives and strategies (including risk appetite and risk tolerance levels) of the regulated firm;

• Requiring the board to provide proper oversight of the senior management to ensure that the senior management is carrying on the day-to-day management of the regulated firm in accordance with the business objectives and strategies set and approved by the board;

• Requiring the board to have an adequate number and mix of individuals who not only have the relevant knowledge, skills and expertise, but also, very importantly, the time commitment necessary, to effectively carry out the duties and functions of the board; and

• Introducing remuneration specific rules that require regulated firms to have a clear and well documented remuneration structure and strategy for the regulated firm which is consistent with the business objectives and strategies of the firm including the risk parameters identified by the board.

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The regulators want to make sure that their Cure (new standards) is making companies stronger and more resilient and is not left to produce a new evil in the form of too much cost and inflexibility. But it is up to the firm to ensure that the requirements are properly implemented and working effectively, taking into account the nature, scale and complexity of the firm’s business. We expect the firms to find it is in their own self- interest to adhere to high standards of corporate governance, as the benefits of adhering to such standards can be reaped by the firm, its owners and its stakeholders. However, where a firm fails to implement required corporate governance standards, the regulator will not hesitate to step in to enforce those standards.

So, to promote sound corporate governance, regulation, corporates and marketplace have to work in partnership, because without each other, they cannot ensure that companies are prudently and soundly managed, in the interests of the company itself, the wider system and of course the shareholders and customers of the firm.

Corporate Governance

Corporate Governance is a dynamic process that constantly needs to adjust andadapt to a changing environment - the quality of corporate governance depends first and foremost on the way people (at all levels) work together and how they cope with and respond to today’s environment with time - market - competitive - regulatory - transparency and Credit Rating Agencies pressures.

Paul M KosterChief ExecutiveDubai Financial Services Authority (DFSA)

Lacunae And Challenges In Current Corporate Governance Practices

A brief review of the causes of the Global Financial Crisis

According to the Financial Crisis Inquiry Commission Dissenting Report, the ten essential causes of the financial crisis were:

1. Credit bubble

2. Housing bubble

3. Non-traditional mortgages

4. Credit ratings and securitizations

5. Financial institutions concentrated correlated risk

6. Leverage and liquidity risk

7. Risk of contagion

8. Common stock

9. Financial shock and panic

10. Financial crisis causes economic crisis.

The US/EU Response to the Financial Crisis

Dodd-Frank Wall Street Reform and Consumer Protection Act- Highlights: The Act provided for consumer protections with authority and independence, attempted to end too big to fail bailouts, and provide for an advance warning system. The Act also provided for transparency and accountability for exotic financial instruments, executive compensation and corporate governance improvements, consumer protections and enforces regulations on the books.

European / UK Response- Highlights: The European response was similar to the US but more regulatory in nature. It holds investors primarily responsible because they nominated the directors who failed in their oversight function. The EU is still considering regulating proxy advisors, board room structure and diversity, credit rating agencies, investors, etc. In the UK, there were similar banking and consumer protections to the US. Additionally, the Stewardship Code was designed to force investors to disclose how they will engage investee companies as responsible owners.

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The Role of the Board - What are the Board’s Duties?

1. The board is there to represent the owner’s interests and engage in:

2. Sustainable long term value creation strategy

3. Management succession planning

4. Risk oversight

5. Executive compensation alignment

6. Provide for audited accounts- Solvency and Dividends /Auditor Independence

7. Exercise duties of care and good faith

What did the Financial Crisis reveal about the weaknesses of Boards?

1. Some boards were uninformed and not sufficiently independent

2. Some Boards were not diverse and had inadequate or inappropriate skills for the boards and committees on which they presided

3. There was a lack of accountability to the owners…little “skin-in-the-game.”

4. Conflicts of interest were present and not properly disclosed

5. Directors could not be removed and essentially elected themselves

6. In many jurisdictions, shareholders had no ability to elect their own representatives

7. Most boards represented a clubby network of experienced businessmen - and interlocks

8. There was little transparency on why these people had been elected

9. Where the CEO and Chairman were held by the same individual, there was an inherent conflict of interest; an employee or an owner-representative?

10. Ineffective, unaccountable Boards were part of the problem with runaway executive compensation and ‘pay-for failure.’

11. They were paid regardless of performance and in numerous cases directors sat on more boards than they could reasonably attend to.

Inherent Conflicts in the Governance Structure

Conflicts of interest in compensation are a lack of independence of compensation consultants, ‘Pay-for-failure’ or a lack of accountability of pay schemes, inappropriate metrics leading to unintended consequences such as unprofitable growth. Lastly, an abiding desire to keep the CEO “happy” can lead to poor board discretion. Conflicts in the accounting and auditing area are insufficient independence of audit firms, too much consulting or non-audit work being done by the auditor, auditors too focused on their business interests can lack scepticism, in addition to a lack of transparency on estimates and judgments.

Relative to board structure, combined Chairman and CEO results in conflicts of interests, and too many executive board members as opposed to independent directors can be a poor balance. Also, the nomination process is one of self-perpetuation and may lead to adverse selection.

Accountability and Transparency

What are regulators now asking of managers or boards since the financial crisis? For auditors, there is a requirement of more disclosure and mandatory rotation is under consideration. For banks, the Volker rule is implemented including tighter lending limits and the creation of the Financial Stability Oversight Board. For boards, diversity, financial literacy, shareholder nominations, independence are top considerations. For Proxy advisors, there are requests for more transparency and conflict disclosure. For credit rating agencies, there are new requirements for more disclosure, increased scrutiny, and more independence. There are new consumer financial protections from unreasonable fees and abusive products. Exotic financial instruments now require more disclosure and transparency. Mortgages now involve counseling, penalties, consumer protection, foreclosure and emergency relief. There is increased transparency and accountability to the derivatives market. Greater regulation of hedge funds is now mandated. The SEC now encourages and rewards whistleblowers. There are now disclosures of risks due to climate change primarily for insurers. And there is a requirement of claw backs of ill-gotten pay.

Checks and Balances

Are there more checks and balances on managers or boards than before the financial crisis? Regarding shareowner rights and responsibilities, we now have votes on pay and golden parachutes (some binding). There is increased democracy in board elections including shareholder nominations in some instances. We now have more independent compensation committees. And there is increased disclosure of director qualifications and skills, including limits on number of boards per director and more professional recruiting of directors. Boards now have increased expectations of shareholder communication and more outreach to shareholders. There is expanded disclosure on pay and investor’s right to a voice. In some countries, there are stewardship codes that require investors to disclose engagement policies, and an increase in comply or explain for all types of best practices.

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The Future - A view into Integrated Reporting

Integrated Reporting begins with the premise of inseparability of good governance, strategy, and sustainability. The guiding principles of integrated reporting are: Strategic focus: An Integrated Report provides insight into the organization’s strategic objectives, and how those objectives relate to its ability to create and sustain value over time and the resources and relationships on which the organization depends. Connectivity of information: An Integrated Report shows the connections between the different components of the organization’s business model, external factors that affect the organisation, and the various resources and relationships on which the organization and its overall performance depend. Future orientation: An Integrated Report includes management’s expectations about the future, as well as other information to help report users understand and assess the organization’s prospects and the uncertainties it faces. Responsiveness and stakeholder inclusiveness: An Integrated Report provides insight into the organization’s relationships with its key stakeholders and how and to what extent the organization understands, takes into account and responds to their needs. Conciseness, reliability and materiality: An Integrated Report provides concise, reliable information that is material to assessing the organization’s ability to create and sustain value in the short, medium and long term.

Conclusions

1. The global financial crisis revealed meaningful shortcomings in the stewardship of companies.

2. A number of regulatory reforms have been enacted that are intended to address systemic failures and correct some of the deficiencies.

3. The system is by no means “fixed” nor perfect.

4. Integrated Reporting provides an important evolution both in reporting and corporate stewardship that is focused on sustainability and long term value creation.

Christianna Wood CFA, CAIA, Chairman, International Corporate Governance Network

Prerequisites Of Good Corporate Governance

This presentation looks at five Prerequisites of Good Corporate Governance:

• Balancing economic and Social goals

• Building accountability

• Developing transparent systems

• Managing regulatory compliance

• Setting the Role and Responsibility of the Board of Directors

Balancing social and economic goals

Quote: “History shows that where ethics and economics come into conflict, victory is always with economics. Vested interests have never been known to have willingly divested themselves unless there was sufficient force to compel them.” B.R. Ambedkar

Good Corporate Governance underpins market confidence, integrity and efficiency. Consequently it is a prerequisite of economic growth and financial stability. Economic scandals resulting in social and political disruption have, therefore, always sparked renewed interest in Corporate Governance:

• The Wall Street Crash of 1929 resulted in the 1933 and 1934 US Securities Acts which mandated independent annual audits and established the SEC.

• The Lockheed scandal in 1976 resulted in the Foreign Corrupt Practices Act (FCPA) being passed by US President Jimmy Carter on December 19, 1977. The Act made it illegal for American persons and entities to bribe foreign government officials.

• In the US in the early 2000s, the massive bankruptcies (and criminal malfeasance) of Enron and Worldcom, as well as lesser corporate scandals, such as AOL, Arthur Andersen, Global Crossing and Tyco, led to increased political interest in corporate governance. This is reflected in the passage of the Sarbanes-Oxley Act of 2002.

• On September 15, 2008, Lehman Brothers filed for Chapter 11 bankruptcy following the massive exodus of most of its clients, drastic losses in its stock, and devaluation of its assets by credit rating agencies. This marked the largest bankruptcy in U.S. history, and is thought to have played a major role in the unfolding of the global financial crisis.

All of these scandals have caused distress and social hardship on a broad scale. Unfortunately, 80 years after the Wall Street Crash, 35 years after the Lockheed scandal and 10 years after the collapse of Enron, corporations still fail, bribes are still paid, investors still lose their life savings and millions still lose their jobs because of bad corporate governance.

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The solution cannot be through an exponential increase in legislation. It can only be through the creation of a strong ethical business culture. Unfortunately, much of the legislation referred to has resulted in increased box ticking and consequently in a significant weakening of ethical business culture developed over centuries.

Building accountability

Quote: The Ancient Romans had a tradition: whenever one of their engineers constructed an arch, as the capstone was hoisted into place, the engineer assumed accountability for his work in the most profound way possible: he stood under the arch.” Michael Armstrong

Accountability with respect to corporate governance is not usually so profound. To what extent, however, should it be associated with legal or criminal liability? How should individuals and organisations be accountable? Let’s look at Enron.

Fortune magazine named Enron “America’s Most Innovative Company” for six consecutive years from 1996 to 2001. At the end of 2001, it was revealed that Enron’s reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud. During its period as “America’s Most Innovative Company” Enron made significant contributions to both the Republican and the Democratic parties. Since then, of course, Enron has become a popular symbol of wilful corporate fraud and corruption.

The scandal brought into question the accounting practices and activities of many corporations throughout the United States and was a major factor in the creation of the Sarbanes-Oxley Act. The Sarbanes Oxley Act was approved by Congress in 2002 and is viewed as the most sweeping legislation passed since the 1933 and 1934 Securities Acts which mandated independent annual audits and established the SEC. It made people more “Accountable.” The Act required that the CEO and the CFO personally sign and confirm the reliability of the financial statements making them legally accountable and criminally liable. Other jurisdictions have since adopted similar legislation. What were the consequences of ENRON?

• 20,000 Enron employees lost their jobs and many their life savings.

• Credit institutions suffered significant losses.

• Directors and managers of the corporation received prison sentences ranging from 18 months to 24 years.

• The President and former CEO, Ken Lay died of a heart attack in July 2006 shortly before sentencing to an expected 20 to 30 years imprisonment.

• The CEO Jeff Skilling is serving a 24 year prison sentence and was requested to pay a $ 45 million fine.

• The scandal caused the dissolution of Arthur Andersen, which at the time was one of the world’s top accounting firms.

• Fortune magazine blamed the accountants and the banks.

• The politicians blamed the accountants and the banks.

In 2001 Enron suffered the largest Chapter 11 Bankruptcy in US corporate history. This has since been surpassed by those of Worldcom in 2002 and Lehman Brothers in 2008. In March 2009, Bernie Madoff pleaded guilty to 11 federal felonies and admitted to turning his wealth management business into a massive Ponzi scheme that defrauded thousands of investors of billions of dollars. On June 29, 2009, he was sentenced to 150 years in prison, the maximum allowed.

It appears that the accountability measures introduced by Sarbanes Oxley have had little impact in improving Corporate Governance!

Developing transparent systems

Good Corporate Governance requires reliable disclosure mechanisms to ensure social performance and acceptance by society. Organizations need to be transparent for success to be sustainable. An important part of such disclosure is satisfied by the publication of an Annual Report including amongst other things a report by the directors, the financial statements and a report by the auditors. Since 2002 the amount of information included in Annual Reports has increased exponentially both in quantity and complexity (many contain over 400 pages) to a point where it is impossible for the average investor to obtain a clear picture of the Company. Transparency without clarity is of no use to anyone!

There may be a ray of light with the concept of Radical Transparency. Radical transparency requires decision making to be transparent right from the beginning of the decision making process. It encourages corrections and improvements to decisions to be made long before poor quality decisions have the chance to be enacted. Radical transparency may, therefore, be the answer provided it communicates with clarity so that the stakeholders are able to understand. Such clarity however, may be difficult considering the current draconian regulatory environment.

Managing regulatory compliance

Quote: “With a University of Rochester study concluding that the total effect of Sarbanes-Oxley has reduced the stock value of American companies by a staggering $1.4 trillion, it is clear that the costly regulatory burdens imposed by this legislation absolutely outweigh its benefits.” Mallory Factor

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The most recent Global Enterprise Survey carried out by the Institute of Chartered Accountants in England and Wales -ICAEW Global Enterprise Survey 2011 - observed: “Businesses in the Asia-Pacific region and The Gulf are most positive about their local regulatory and tax environments and therefore presumably supportive of growth. A simplistic way of managing regulatory compliance could, therefore, be to move the business to another jurisdiction:

• The aftermath of Sarbanes-Oxley resulted in a significant reduction in market capitalisation in the US. This included the delisting of major non-US corporations such as Allianz, FIAT and Repsol.

• More recently European companies are seeking listings in stock exchanges outside the EU. The Italian fashion group Prada was recently listed in Hong Kong.

• In Europe there is an increasing trend to move group HQs out of the European Union member states.

For major corporations compliance has generally been resolved with additional costs for consultants and internal resources. Small and Medium Sized Enterprises, however, have faced significant disruption with such costs being unsustainable.

Setting the role and responsibility of the board of directors

Quote: “So the question is, do corporate executives, provided they stay within the law, have responsibilities in their business activities other than to make as much money as possible? And my answer to that is, no.” Milton Friedman

Milton Friedman clearly based his opinion on the Anglo-Saxon “unitary” model which tends to emphasize the interests of shareholders and relies upon a single-tiered Board of Directors composed of a mixture of executives from the company and non-executive directors, all of whom are elected by shareholders.

The multi-stakeholder model associated with Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers, and the community. Germany and the Netherlands, for example, require a two-tiered “dualistic” system where the Executive Board runs day-to-day operations and the Supervisory Board is made up entirely of non-executive directors who represent shareholders and employees. In the Italian and Japanese models the supervisory role is in part undertaken by independent “Statutory Auditors” who are elected by the shareholders and hold a position in the hierarchy alongside the Board of Directors. The “Statutory Auditors in Japan (Kansayaku) or in Italy (Collegio Sindacale) may be one individual or a collegiate body of three professionals.

Whatever the structure, how should Boards effectively operate? In most jurisdictions company law sets out, in general terms, the duties of directors but more detailed guidance is not normally mandatory. A good example of this is

the recent Guidance on Board Effectiveness issued by the Financial Reporting Council (FRC) to assist companies in applying the principles of the UK Corporate Governance Code. It does not set out “the right way” to apply the Code but it is intended to stimulate boards’ thinking on how they can carry out their role most effectively. It is for individual boards to decide on the governance arrangements most appropriate to their circumstances.

Similar guidance exists in many jurisdictions but, like the guidance issued by the FRC, is generally aimed at larger organisations listed on the stock exchange. Full compliance with such guidelines may be excessively burdensome for small and medium sized enterprises so some flexibility is required. A good example of this is with Italian legislation where the shareholders are allowed to choose between three different corporate governance models: 1. The unitary Anglo-Saxon model. 2. The Germanic dualistic model. 3. The traditional Italian model using the “Statutory Auditors” in a supervisory role. The latter model, particularly, allows a significant degree of flexibility for small enterprises.

Concluding remarks

Eighty years after the Wall Street Crash, thirty five years after the Lockheed scandal and ten years after the collapse of Enron, corporations still fail, bribes are still being paid, investors are still losing their life savings and thousands/millions are still losing their jobs because of bad corporate governance. The severe penalties imposed pursuant to the ENRON scandal did not deter Bernie Madoff from defrauding thousands of investors of billions of dollars nor did they stop Lehman Brothers from collapsing.

“Improved transparency” imposed by rules, regulations and contorted accounting standards has resulted in Annual Reports running into several hundred pages which no-one can understand. Increased regulatory compliance has, in fact, significantly increased costs for businesses, with small and medium sized enterprises, in particular, suffering from significant disruption. Consequently, businesses are reacting positively to areas with more favourable local regulatory and tax environments. Bureaucracy appears to have become the champion over effective corporate governance. Excessive regulation creates barriers to the global trade and investment market and consequently to growth. There is no evidence of such regulation improving corporate governance, strengthening the resilience of financial markets or resulting in fair fiscal policy.

The Radical Transparency concept could be a ray of light in what appears to be an obscure maze of rules and regulations, provided, of course that it does not become a tool for the bureaucrats. The idea of encouraging corrections and improvements to decisions to be made long before poor quality decisions have the chance to be enacted is appealing.

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Non-mandatory measures to improve corporate governance are always more effective. The new FRC Guidelines on Board Effectiveness being a good example. Flexibility in their adoption is, however, essential and the model adopted should be that which is most appropriate to the specific characteristics of the organisation. Only in this way is it possible to move away from a tick the box mentality and create a strong ethical business culture.

David Crackett, SDA Bocconi Professor Vice President COBCOE (Council of British Chambers of Commerce in Europe),

Impact Of Corporate Governance On Value Of The Firm

Ethical Corporate Governance and company performance:

A recent survey by Corporate Executive Board (CEB) indicated that companies with a high level of integrity within their corporate culture outperform companies with low levels of integrity by more than 16% when it come to shareholders returns over a ten year period. Source:http://www.executiveboard.com/executive-guidance/2011/annual/index.html

Corporate Governance in du

“du firmly believes that promoting a proactive corporate governance culture within the Company is consistent with du’s brand values and will enhance the performance of the organization and boost investor and regulator confidence“ du Corporate Governance Manual

Four forces are driving changes in corporate governance at du

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du’s Governance over the years

Key Challenges in implementing Corporate Governance

Key Results for du

• Achieved revenues of AED 2,172 million a 28% increase year on year in Q2 11.

• Mobile revenue increased by AED 87 million quarter on quarter in Q2 11, or AED 404 million year on year, representing 32% growth to AED 1,664 million.

• Mobile data revenues increased 74% year on year in Q2 11 to 151 million (9% of mobile revenues).

• Total net active mobile customers at 4,775,900.

• 25% growth in du’s fixed line customer base from 499,900 lines in Q2 10 to 623,600 lines in Q2 11.

• Q2 11 is the third consecutive quarter of positive cash flow.

• Continued to provide innovation, value for money and performance to all our customers

• Well positioned to achieve long term growth and sustainable profitability

• Net profit increased to AED 414 million in Q2 11

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Rights Issue

du has announced the successful completion of the subscription period for the Company’s previously announced Rights Issue, raising AED1 billion to fund accelerated growth.

The founding shareholders have taken up their rights in full, and public shareholders have oversubscribed for their portion of the Rights Issue, demonstrating investor confidence in du’s growth strategy.

Reputation

du has been placed 1st in 2011 and 5th in 2010 on Standard & Poor’s Hawkamah Pan Arab Environment, Social and Governance (ESG) Index The purpose of the ESG Index is to raise the profile of those companies that perform well along the three parameters of environmental, social and corporate governance practices when compared to their market peers. Hence, demonstrating superiority in these areas and in return a positive image.

Question for willingness to pay a premium for a well-governed company

Question: If you were a key investment decision maker, would you be willing to pay more for company B’s stock compared to A’s?

Mahmood Ali Hussain Ahmad, Vice President - Board Relations, Corporate Governance and Compliance du

Corporate Governance In The Pursuit Of Productivity Enhancement For The Asia-Pacific

The Asian Productivity Organization (APO) was established on 11 May 1961 as a regional intergovernmental organization that is non-political, non-profit and non-discriminatory. Its mission is to contribute to the sustainable socioeconomic development of Asia and the Pacific through enhancing productivity, and it aims to be the leading international organization on productivity enhancement, enabling APO economies to be more productive and competitive by 2020. The current membership comprises 20 countries in the Asia-Pacific which act in a spirit of mutual cooperation by sharing knowledge, information, and experience on driving productivity. The Secretariat also undertakes joint programs with other international organizations, governments, and private institutions for the benefit of its members.

The corporate governance (CG) scandals that occurred around the world in the early 2000s also impacted many APO members. CG was revisited and is now viewed as a vital factor in sustaining the transparency and credibility of the region’s economy to continue attracting the interest of global investors. This need of member countries spurred the APO to provide assistance and guidance on proactive responses to CG-related issues to ensure the continued growth, productivity, and economic progress of the region.

The APO conducted several projects in relation to CG, beginning with the Basic Research XI on the Impact of Corporate Governance on Productivity, which looked at ten APO member countries to examine key areas of CG and determine the relationship between the ways firms are governed and their productivity performance. The Top Management Forum on Corporate Governance in March 2003 brought together over 50 top-level representatives of the business and government sectors in the APO membership to share experiences and inputs on how top managers can promote better governance in their organizations to increase productivity and competiveness. In 2004 and 2007, the APO produced publications on CG practices in the region.

The uniqueness of corporate ownership styles found in many APO member countries was a relevant factor in considering how to promote CG in the region. Basic research and several case studies revealed a high ownership concentration in many enterprises in the Asia-Pacific, usually in a family-owned or state-owned framework. It was also recognized that corporate activities are often organized under relationship-based frameworks, rather than third-party networks. While a high ownership concentration may not necessarily be a hurdle to improving

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overall performance as it lowers transaction costs and creates a close-knit corporate body based on shared goals, efforts nevertheless should be made to remove ambiguities of both authority and process that can exist in relationship-based systems.

The various forms of diversity in the region was another aspect requiring focus, specifically to determine how differences in perspective, culture, or practice may impact the framing of a common goal of promoting CG within the region. Differences in the speed and direction of economic development, legal and social environment, and need and strategies for corporate reform would allow member countries to share the same overarching goal of promoting good governance, while recognizing different areas of CG which need to be strengthened and the approaches and strategies applicable for a specific industry or economy.

The APO also recognized that CG is a concept that is both embodied and driven by various individual elements, such as board responsibilities, stakeholders’ roles, and disclosure frameworks. Mechanisms for information flows and processes of internal decision-making are similarly relevant and affect enterprise governance. Finally, the role of corporate leaders and their management skills play a crucial role in achieving better governance, profitable results, and higher productivity. Therefore recent APO projects have attempted to address specific elements that affect governance in an enterprise.

The annual Top Management Forum continues to provide a platform for leaders from APO member countries to discuss corporate management practices and examine their own roles in achieving productivity and sustainability. Business excellence programs provide industries in the region with mechanisms to develop corporate frameworks leading to good governance and fulfillment of corporate social responsibility.

The APO firmly believes in the importance of exchanges among its members and outside the region to promote sound CG. After recently celebrating its 50th anniversary, the APO is embarking on its next 50 years of contributing to the region’s vibrant socioeconomic growth by continuing to offer relevant productivity tools, knowledge, mechanisms, and frameworks to support member countries in creating a culture of excellence and good governance.

Yumiko Yamashita, Program Officer, Industry Department, Asian Productivity Organization

Roles And Responsibilities Of Boards In Managing Future Risks Board members are directly accountable to the shareholders for the progress, performance and development of the company. It is the board of directors’ key role to ensure that the company is prosperous by collectively directing the company’s affairs, while also taking into account the interests of all the shareholders and stakeholders.

Roles and responsibilities of Boards in managing future risks. The below topics were addressed during the presentation:

• Board composition and diversity

• Distribution of power

• Engaging shareholder

• Engaging stakeholders

• Initiating, influencing and monitoring strategic decisions

• Risk management

Board Composition and Diversity

The board of directors of all companies are said to directly or indirectly influence corporate performance, such as when boards monitor management (direct influence), or through the actions of their selected senior executives such as the company CEO (indirect influence). The financial performance therefore of any corporation is said to be influenced strongly by the board members who are in control. Such an influence can be either positive or negative and would depend on demographics such as size, independence, duality of functions (viz., when the CEO of the company is also a board member), presence of women, outside directors, and cultural diversity; cognitive influences such as educational background, functional background, specific knowledge on the company, specific expertise (finance, law, strategy etc.); and relationships such as when a board member is a director in other companies, has networks, and organizational reputation.

Distribution of Power

The distribution of power mainly depends on the shareholders structure, and on the nature of the business concerned. In the corporate world there are many who are in favour of a board member being an executive (such as a company CEO being a board member), for it encourages an improvement in company performance providing clarity as to who has authority and who is responsible over particular matters. Additionally, it is often assumed that directors who are already working within the company cannot effectively and impartially monitor their own performance.

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Engaging Shareholders

All Board of Directors are encouraged to develop their own strategic communications policy. There is no standardized template on such a policy and each board must establish its own guidelines. Additionally, all communication should be relevant and within the set timeliness.

Engaging Stakeholders

It is imperative that the board develops a strategic communications policy for each group of stakeholders (customers, employees, regulatory officials) based on relevance and timeliness. Stakeholder engagement is integral to a company’s business. In fact, key stakeholders influence and impact a company’s policy development, and outside perspectives of the company. Such engagement has thus been increasingly identified as key to the success of a business as stake holders can have economic, political, social, or even managerial effects on a company and engagement is therefore an important part of anticipating business opportunities and risks. Initiating, Influencing and Monitoring Strategic Decisions

The Board is entrusted with the role of setting strategic trends, establishing corporate policies, and hiring and evaluating the CEO. This senior executive (CEO) then reports to the board and is entrusted with the responsibility to carry out the strategic policies initiated by the Board. Every decision a Board member makes should therefore take into account the needs and expectations of all stakeholders. It is therefore the Board’s duty to analyze the environment (opportunities / problems) and the firm’s resources (forces / weaknesses), identify and select strategic options, ensure strategic implementation, and monitor and evaluate progress.

Risk Management

Considering the variety of risks, like financial, fraud, corruption, disaster, product liability, EHS, IT and intellectual property, it is recommended that a dedicated committee or a subcommittee should be established by the board so as to avert any future financial catastrophes. Additionally, a risk control policy should be defined, and legal compliance programs should be set in place so as to avert any possible risk. Furthermore a compliant corporate culture should be established and the entire board should receive training accordingly.

Wolfgang Braun, Head of Energy Transmission, Siemens Middle East

Corporate Governance: The Singapore Journey

Singapore’s journey in reforming corporate governance started in 1999/2000 with the establishment of the private sector-led Corporate Governance Committee (CGC) by the Singapore government to develop Singapore’s first Code of Corporate Governance. The CGC was one of three private-sector led committees formed to review corporate governance, disclosure and accounting standards, and company law and regulatory framework. These initiatives were in response to the 1997/1998 East-Asia financial crisis. The government, on the recommendations of the high-level Corporate Finance Committee, decided that Singapore should move from a merit-based to a disclosure-based approach to regulating our capital markets.

The Report of the CGC and the Code of Corporate Governance was released in March 2001. Singapore adopted the balanced approach. The Code of Corporate Governance is based on “comply or explain”. Singapore has become more prescriptive through incorporation of more corporate governance requirements in listing rules, but remains one of the least prescriptive. Many other reforms also occurred, for example, introduction of the Securities and Futures Act in 2001.

Regulatory Approaches to Corporate Governance

Each approach has its costs and benefits and its appropriateness depends on the state of development of the capital markets and the institutional environment Some countries are more prescriptive in certain areas, but less prescriptive in others.

Most countries have become more prescriptive, including Singapore, because of realisation that “self-regulation” or purely market-driven approaches are not adequate. Enforcement is critical to ensuring effective implementation of whatever approach is chosen.

Market-Driven Initiatives to Raise Corporate Governance Standards in Singapore

Establishment of institutions such as Securities Investors Association of Singapore (SIAS) to champion minority shareholder rights, Singapore Institute of Directors (SID) to upgrade professionalism of directors, and corporate governance centres in universities. Publication of corporate governance indices ranking best and worst companies, and corporate governance-related awards to recognise the best.

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Market-Driven Initiatives to Raise Corporate Governance Standards in Singapore

Corporate Governance Week started by SIAS, and many corporate governance conferences and seminars. Increasing activism by shareholders (especially international institutional investors), and scrutiny by media and corporate governance advocates of corporate governance issues. Singapore is now participating in an ASEAN initiative driven by regional securities regulators (but led by local experts) to publish ranking of best-governed large market cap companies in each country and in ASEAN, as part of the efforts to showcase ASEAN as an asset class to global investors. The first ranking within each country will be published by end of Q1/beginning of Q2 in 2012.

Corporate Governance in Singapore After 10 Years of Reform is well regarded in Asia

Figure 3

Marketing category scores(%) Total CG rules &

practices

Enforce-

ment

Political &

regulatory

IGAAP CG

Culture

1. Singapore 67 65 60 69 88 53

2. Hong Kong 65 59 63 67 80 54

3. Japan 57 45 53 62 75 53

=4. Taiwan 55 50 47 56 78 46

=4. Thailand 55 56 42 54 73 49

6. Malaysia 52 49 38 60 80 32

= 7. India 49 46 36 54 63 43

= 7. China 49 47 36 56 75 30

9. Korea 45 43 28 44 78 33

10. Indonesia 40 39 28 33 67 32

11. Philippines 37 35 15 37 75 25

Source: Asian Corporate Governance Association

But It Lost Momentum….and the Corporate Governance Culture Remains a Challenge

Figure 1

CG Watch market scores: 2007 vs 2010(%) 2007 2010 Change Trend of CG reform

1. Singapore 65 67 (+2) Improving slowly, negative cancel positves

2. Hong Kong 67 65 (-2) Some regression, static overall

3. Japan 52 57 (+5) Improving, but will reform be sustained?

=4. Taiwan 54 55 (+1) Static overall, loss of focus

=4. Thailand 47 55 (+8) Improving, but political uncertainties remain

6. Malaysia 49 52 (+3) Improving, but held back by “CG culture”

= 7. India 56 49 (-7) Over-rated last time, but slow improvements

= 7. China 45 49 (+4) Improving, but held back by “CG culture”

9. Korea 49 45 (-4) Regressing, turning inward

10. Indonesia 37 40 (+3) Improving, but weak political system

11. Philippines 41 37 (-4) Regressing, but new government may help

Source: Asian Corporate Governance Association

The Singapore Stock Market Has Grown

At the end of 1999, there were 327 main board companies and 81 SESDAQ (second board) companies. Total market capitalisation was S$456 billion. Therefore, average market capitalisation was S$1.18 billion. There were some large secondary listings and some regional listings, but local companies dominated. The Singapore stock exchange was demutualised in 1999, turning it into a listed company which is also a frontline regulator.

But The Growth Has Been Mainly in Foreign Listings and Small Companies….

• As at November 2011, there are 646 main board companies and 130 CATALIST (second board) companies.

• 461 are domestic listings, 151 China listings and 164 other foreign listings. That is, 40 percent are foreign listings.

• Total market capitalisation as November 2011 was S$784 billion. Therefore, average market capitalisation was S$1.01 billion.

• However, it is estimated that close to 80 percent have a market capitalisation of less than S$300 million and almost 40 percent have a market capitalisation of less than S$50 million.

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There Has Been A Significant Increase in Corporate Governance Scandals….

• As we moved from merit-based to disclosure-based approach, there was a series of accounting irregularities/corporate governance scandals between 2002 - 2005 - even though Singapore strengthened its corporate governance regime. This involved mainly domestic companies.

• The Singapore Exchange (SGX) aggressively pursued listings, and as Singapore has a small domestic economy, it has to attract foreign listings. It was passive as a frontline regulator.

• As we attracted more foreign companies to list, there was a series of accounting irregularities/corporate governance scandals involving mainly foreign companies, especially those from China. It is estimated that at least 10 percent of the China listings have been plagued with accounting irregularities and/or corporate governance scandals.

• The biggest challenge that has emerged is the limited ability to enforce our laws and regulations for foreign listings. This has contributed to a valuation discount for foreign listings, especially those from China, where enforcement challenges are particularly serious.

Recent Reforms and Future Trends in Corporate Governance in Singapore

• The Singapore Exchange has recently strengthened its enforcement and its listing rules relating to corporate governance, some of which are targeted at foreign listings, especially Chinese companies.

• The Monetary Authority of Singapore (which is also the securities regulator) has assumed responsibility for overseeing the review of the Code of Corporate Governance Code and approving it.

• The Corporate Governance Council established by MAS has just released its final recommendations on proposed revisions to the Code, which is awaiting approval by MAS.

• Some of the key proposed changes in the Code include:» strengthening the definition and criteria for independent directors to include

independence from substantial shareholders» increasing the proportion of independent directors to majority where the

Chairman is not an independent director» disclosure of exact remuneration of each individual director and the CEO» strengthening of risk management practices» greater focus on shareholder engagement and responsibility

• However, two widely debated reforms - limiting the tenure of independent directors and the number of directorships held - were not adopted.

• The Code will continue to operate on a “comply or explain” basis.

• Whether the proposed revisions will lead to substantive changes in corporate governance remains to be seen, especially if there is little board renewal due to long-tenure independent directors sitting on many boards.

Lessons from the Singapore Experience for Other Regulators

• Good corporate governance is of fundamental importance to building a robust capital market, attracting good companies to list and attracting investors.

• Demutualisation of exchanges can dilute regulatory oversight if exchanges have dual commercial and regulatory roles (as they often do).

• Foreign companies may list on a foreign stock exchange for positive business reasons but may also list for “regulatory arbitrage”

• The ability of domestic regulators to enforce rules for foreign listings may be limited, especially as there is no mutual co-operation between regulators in the country of listing and the country of domicile.

Corporate Governance Regulatory Framework in Singapore

• ACRA = Accounting and Corporate Regulatory Authority (=Registrar of Companies + Public Accountants Oversight Body)

• MAS = Monetary Authority of Singapore (=Central Bank + Securities Regulator)

• SGX = Singapore Exchange (frontline regulator of listed companies)

• ASC = Accounting Standards Council (=accounting standard-setter)

• SIC = Securities Industry Council (=takeover panel)

• CGC= Corporate Governance Council (=review of code of corporate governance)

• CAD = Commercial Affairs Department (=commercial crimes investigator)

• CPIB = Corrupt Practices Investigation Bureau (=investigator of corruption-related crimes)

• AGC = Attorney-General’s Chambers (=public prosecutor)

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Corporate Governance Regulatory Framework: Key Sources of CG Rules in Singapore

Source Examples of What They Cover in Terms of Corporate Governance

Companies Act Duties and liabilities of directors; powers/rights/equitable

treatment of shareholders; audit; annual reports; share-

holder meetings

Securities and Futures Act False of misleading statement; continuous disclosure of

price-sensitive information; insider trading; market rigging

and manipulation; prospectus requirements

Other Laws, Regulations, and

Codes (e.g., for banks, insurers,

REITs)

E.g., Banking Act and regulations, Insurance Act and

regulations, Code on CIS

Accounting and Auditing Stan-

dards

Detailed standards governing preparation and audit of

external financial statements

Source Examples of What They Cover in Terms of Corporate Governance

SGX Listing Rules Board and board committee requirements; related

party transactions; share issue; share-based incentive

schemes; interim reporting; results announcements;

disclosures in annual reports; continuous disclosure;

“comply or explain” requirement for Code of Corporate

Governance

Code of Mergers and Takeovers

(“Takeover Code”)

Thresholds for general offer; disclosures in relation to

mergers and acquisition; approval of acquisition for target

company

Code of Corporate Governance Board of directors; executive and director remuneration;

audit, internal control and accountability; communication

with shareholder; role of institutional shareholders

Articles of Association Issuing of shares, voting rights of shares, appointment

of directors, directors mmetings, delegation by directors,

special voting rights of a Chairman and his/her election,

etc.

Case Examples of Well-Governed Companies in Singapore

• Singapore Telecommunications Ltd (SingTel)» Top ranked company in corporate governance, scoring 80/100 base score

and +29 bonus/penalty in the Governance and Transparency Index» Largest company by market capitalisation (S$50.3 billion as at 10 December

2011)» Dual primary listing on the SGX and Australian Securities Exchange (ASX) » Government-linked company with Temasek Holdings owning 54.41 percent

as at 31 May 2011» Most widely held stock in Singapore with 338,000 shareholders as at 31

May 2011

• Some key strengths of SingTel» Good size board of 9 directors, with diverse competencies, backgrounds

and gender (including international directors from major markets it operates in), and 2/3 of independent directors (with CEO being the only executive on the board)

» Chairman (Non-executive) and CEO positions are held by different individuals » Practices periodic board renewal, with non-executive directors not serving

more than nine years» Reasonable remuneration levels for senior executives, very well-designed

pay-for-performance (performance shares but no stock options), and total transparency in pay levels and mix

» Non-executive directors are paid well but appropriately, with no incentive-based pay but purchase of shares using fees to be held throughout their tenure, and total transparency in pay levels and structure

» Follows higher of the standards of the SGX and ASX (even though it is not required to)

» Does not just comply with minimum standards in the Code and rules, often ahead of corporate governance rule changes and a continuous improvement mindset

• Qian Hu » Eighth ranked company in corporate governance, scoring 70/100 base score

and +10 bonus/penalty in the Governance and Transparency Index» Small company (market capitalisation of S$39.5 million as at 10 December

2011) in consumer discretionary sector (ornamental fish and accessories)» Family-controlled company with family members holding 58.5 percent as at

1 February 2011» Sets the benchmark for small companies and demonstrates that small and

family-controlled companies can be well-governed

• Some weaknesses of Qian Hu (which are quite typical of family and founder

controlled companies in Singapore)» Although 3 out of 7 directors are independent, the board is dominated by

executive directors, who are mostly family members

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» Some long serving independent directors (10 years)» Single Chairman and CEO

• Some strengths of Qian Hu:» One of the first companies to voluntarily release quarterly results even though

it is not required to do so (only companies with market capitalisation greater than S$75 million have to do so)

» Very fast in releasing its annual and quarterly results with 14 and 18 days respectively (SGX requirements are 60 and 45 days respectively)

» Perceived to be an ethical company» Does not just comply with minimum standards in the Code and rules,

often ahead of corporate governance rule changes and has a continuous improvement mindset

Mak Yuen Teen, Associate Professor of AccountingNUS Business School

The Centre for Responsible Business is an initiative by Dubai Chamber of Commerce & Industry, which aims to raise the level of awareness, and encourage standards of good practice in organizational ethics, corporate responsibility and governance through the provision of research, training and advisory work for members and stakeholders

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Notes