Corporate governance for business success

Business Leads catches up with Associate Professor Mak Yuen Teen, whose book From Conformance to Performance: Best Corporate Governance Practices for Asian Companies was launched on 29 July 2005 by McGraw-Hill and the Singapore Institute of Directors at the Executives' Club, OCBC Centre.

The book launch attracted 150 people, mainly directors, senior executives and industry professionals. Assoc Prof Mak gave a speech on "What's New in Corporate Governance?", which covered changes in the recently revised Singapore Code of Corporate Governance, emerging best practices in international companies, changing expectations with regard to directors' duties, and key issues to be addressed in “whistle- blowing” arrangements in organisations.

How does conformance to regulations lead to better performance? Is that not a contradiction?

There is a misunderstanding that corporate governance is purely about conformance to regulations. Companies often approach corporate governance with a "box-ticking" mentality, making sure that rules and codes are complied with in form, rather than in substance.

Real improvements in corporate governance can only come about if companies embrace the spirit of good corporate governance that includes inculcating a strong ethical culture within the organisation emanating from the very top. This would mean having a board of directors who have the right skills, are committed to the company and have adequate independence.

Currently, local companies pay their independent directors between S$15,000 to S$25,000, when countries such as Australia or UK pay theirs at least three times as much. If companies embrace the spirit of good corporate governance, pick directors with the attributes I referred to above and pay them appropriately, then the governance and the performance of the companies will improve.

The book goes far beyond teaching companies how to comply with regulations and codes. It also provides ideas on practices that can truly improve corporate governance and result in better performance.

Any successful examples of Asian firms which have used corporate governance to their advantage?

The typical Asian company, because of its concentrated shareholdings, faces special challenges because of the blurring of the lines between shareholders, the board of directors, and management. The biggest challenge is ensuring that independent directors are able to protect shareholders' interests against conflicting interests of management, and also ensuring that large shareholders do not take advantage of small shareholders. The latter problem is usually less of an issue in companies in the U.K. and U.S., for instance.

Companies like Singtel, Keppel Corp, and SMRT take corporate governance very seriously. Singtel is one of the few Singapore companies with an independent Chairman of the Board, and the first Singapore company to have the CEO and CFO sign off the financials. Singtel has a very well-designed performance share scheme for its CEO, and good disclosure of remuneration, amongst other good practices.

Keppel Corp has a lead independent director to compensate for the fact that they do not have a separate Board chairman. It is one of the first few Singapore companies to have a “whistleblower procedure”.

In Asia, we generally still do not have what I would call effective shareholder engagement, whereby unaffiliated institutional investors who have a significant stake in a company engages with the senior management and the board to effect real changes in corporate governance, such as replacement of the CEO and directors.

We have seen Sovereign Asset Management attempting this in South Korea but recently quitting their presence completely there, after appearing to have made little headway. Yet, there is increasing evidence that such shareholder engagement leads to significant improvement in stock price performance.

In your opinion, and based on the recent Corporate Governance and Financial Reporting Centre (CGFRC) survey findings, what will be the future trend of corporate governance in Singapore? Is it picking up at a fast enough pace?

I think recent corporate scandals relating to companies such as CAO, Citiraya, ACCS, Informatics and others have led to considerable soul-searching about the true state of corporate governance in Singapore and whether further improvements are needed.

However, the counterbalance to this is the concern that further enhancements to our corporate governance framework will increase business costs, and make Singapore uncompetitive. My view is that we need to first make sure that existing rules are properly enforced.

Singapore can never set as high a threshold as the U.S. in terms of corporate governance standards, but I think we should constantly review our standards relative to the more developed economies. Corporate governance costs are a small part of total business costs, and if properly implemented, corporate governance can minimise the risk of corporate governance failures and the massive destruction of shareholder value and damage investor confidence.

Singapore is moving a little slower than I like, but improving corporate governance is a long distance race, not a sprint. I think more can be done to assist companies to move further up the curve, such as training and building up a pool of good directors.

Why is the area of corporate governance of special interest to you?

Corporate governance is one of those areas where there is almost a seamless relationship between research, teaching, policy making and practice. This is not the case in many other areas, where there is a large disconnect between research, teaching and practice.

The experience and knowledge I have gained from sitting on various corporate governance-related bodies in government and industry and from my interactions with directors, executives and other professionals immensely enrich my teaching of this subject at NUS Business School. I would say that I've learnt as much from practitioners as I have, hopefully, enhanced their understanding of issues.

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