Published December 25, 2008

SGX should set governance benchmark

By OH BOON PING
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THE unfolding economic crisis has already thrown up some lapses in corporate governance at several listed companies. However, one silver lining is that independent directors seem more prepared and willing to take action to help put things right and address the issues at hand - in one instance, even travelling overseas to obtain more information on what went wrong.

Hitting home: If the SGX is truly seeking to uphold high standards of corporate governance for the market, it has some issues of its own to address

So while the lapses in corporate governance is regrettable, what's detectable is also a greater appreciation of the duties and responsibilities of independent directors, and with that, a generally higher awareness of corporate governance demands.

Some of the credit for this has to go to the Singapore Exchange (SGX), for its various efforts to raise the level of corporate governance as well as to push for more director education. But if corporate governance advocates are allowed to have one wish for the new year, it is that the SGX itself would be more mindful of the position it occupies in setting the tone for the rest of the market.

Two issues come to mind, and they are ones that surface frequently in corporate governance discussions. The first is cross directorships. A look at the SGX's 2008 annual report shows that its board of directors include a number of independent non-executive members who are holding concurrent board appointments at other listed companies or market players. These include SIA chief executive Chew Choon Seng, Fraser & Neave director Ho Tian Yee, independent director Low Check Kian, who also serves on the board of Fibrechem Technologies, and Robert Owen, chairman of Crosby Capital Partners and IB Daiwa Corp.

Now cross directorships are fairly common in Asia, as most corporate personalities move in similar circles. But because SGX is also a regulator, this raises some concerns. The SGX regulates listed companies, sets policies and rules for them, and in general construct the framework for them to exist as quoted entities. Yet, some directors of these companies also sit on the board of the SGX. To some, this introduces a potential conflict of interest. Indeed, industry best practices dictate that such relationships should not exist at all.

Granted, there are various safeguards. The SGX and its appointments come under the scrutiny of the Monetary Authority of Singapore, and there are rules to ensure board independence. Also, a case can also be made for the SGX's board having representation from listed companies - so that the regulator remains in touch with the market.

However, weighed against this is the appearance of a potential conflict of interest. And this should be an important consideration, since listed companies here may look to SGX as an example to follow.

A second issue concerns the exchange's remuneration package. For example, chief executive Hsieh Fu Hua's annual bonus appears to be highly correlated with SGX's operating profit, as the two moved almost one-for-one, based on the previous three years' data.

This could be a result of SGX pegging its CEO's bonus to financial benchmarks - not surprising given that its performance share grants are vested based on average return on equity (ROE), absolute total shareholder return (TSR) and its TSR relative to the Straits Times Index's TSR.

But because SGX is also the market regulator, this again presents the appearance of a potential conflict of interest. Some say that this could lead to the temptation to relax regulatory effectiveness in favour of more listings on the local bourse, for instance.

Added to this is the size of the pay packet that SGX gave to its CEO, compared with other developed bourses.

Last year, the stock exchange gave out a total of $7.18 million to its chief executive - compared with A$3 million (S$2.96 million) at ASX and £pounds;1.66 million (S$3.6 million) at the London Stock Exchange. This is perhaps not surprising if the CEO's annual bonus is indeed pegged to SGX's strong performance in the past few years. But while this speaks well of the exchange as a pay master, it makes one wonder if SGX could be overpaying its management. This is especially so given that the stock markets in London and Australia are far deeper than the Singapore market.

While the pay of the CEOs of other stock exchanges are also pegged to financial performance such as earnings per share and TSR, it is also clear that a number of these exchanges such as the Australia Stock Exchange (ASX) are no longer playing the regulatory role that SGX still does.

To promote greater market integrity, ASX has gone a step further by surrendering its supervisory function to a markets supervision board that operates under its own charter and in line with its own principles-based approach to supervisory operations. So, in such cases, the issues pertaining to a conflict of interest do not apply.

In many areas, appearances do not matter. But it does in corporate governance. If the SGX is truly seeking to uphold high standards of corporate governance for the whole market, it has some issues of its own to address.