CORPORATE GOVERNANCE IN SINGAPORE
Corporate governance can be defined as the system by which companies are directed and
controlled. Its objective is often stated as being the enhancement of corporate profit and
shareholder gain while having regard to the impact that this may have on other stakeholders of
the company.
Sir Adrian Cadbury once described corporate governance as follows: ‘Corporate governance is
concerned with holding the balance between economic and social goals and between individual
and communal goals. The corporate governance framework is there to encourage the efficient
use of resources and equally to require accountability for the stewardship of those resources.
The aim is to align as nearly as possible the interests of individuals, corporations, and society.’
Global Corporate Governance Forum, World Bank, 2000.
In line with the description above, corporate governance frameworks and mechanisms are
generally targeted at improving a company’s efficiency (or performance) and/or providing
greater transparency and accountability to shareholders and other stakeholders.
REGULATORY FRAMEWORK FOR CORPORATE GOVERNANCE IN SINGAPORE
One way of looking at the regulatory framework for corporate governance in Singapore is to
divide the framework into two broad categories:
1. legal regulation (including quasi-legal regulation)
2. codes and best practice (in particular, the Singapore Code of Corporate Governance
2005).
It is not possible, in an article of this length, to discuss all the relevant rules that relate to these
aspects of the regulatory framework. Instead, this article highlights the key rules that operate in
the respective categories, and their function.
LEGAL AND QUASI-LEGAL REGULATION
The regulatory framework for corporate governance in Singapore is underpinned by corporate
law and securities regulations. These are reflected in common law rules as well as in statutory
enactments such as the Companies Act (cap 50, ‘the Act’) and the Securities and Futures Act
(cap 289). This is supplemented by quasi-legislative enactments such as the SGX-ST Listing
Manual (‘SGX Listing Rules’), which applies only to companies listed on the bourse of the
Singapore Exchange Securities Trading Ltd (‘SGX-ST’), and the Singapore Code on Takeovers
and Mergers. The key aspects of corporate governance governed by law are discussed below.
Compliance with legal rules is mandatory in that a breach of these rules may result in civil or
criminal sanctions or, in the case of a breach of SGX Listing Rules, administrative sanctions
such as censure, share trading suspension, or delisting.
Structure and control
There are three aspects to the regulatory mechanisms relating to the structure and control of
companies. First, it is important to understand and provide access to information on the
shareholding and organisational structure of a company because this has an impact on who has
control over the company which, in turn, has an impact on how the company is governed. The
law therefore requires that companies keep registers of members, and these registers may be
inspected (sections 190–192). (Note: All section numbers will refer to the Companies Act (cap
50) unless otherwise stated.)
In addition, listed companies have to maintain a register of substantial shareholders who have
to report changes in their shareholdings (division 4 of Part IV of the Companies Act and section
137 of the Securities and Futures Act). ‘Substantial shareholders’ are defined as being those
who have an interest in shares which carry not less than 5% of the total votes attached to all the
voting shares in the company. Similar reporting and disclosure requirements are imposed in
relation to directors as they too are in a position to control the company. Parties who control
voting rights through other persons or companies, or through a chain of companies (a practice
sometimes referred to as ‘pyramiding’), must also disclose these interests because of provisions
that deem such interests as belonging to the controlling parties (see section 7).
Second, for companies to operate effectively and efficiently, it is necessary to demarcate clearly
the respective roles that management and owners undertake in the venture. Essentially,
management must be able to perform their function without unnecessary intervention by the
owners. Conversely, owners may wish to have in place control mechanisms that enable them to
rein management in, should the need arise. Section 157A of the Act provides that the business
of the company is to be managed under the direction of the directors, and gives to the directors
the right to exercise all the powers of the company except those reserved by the Companies Act
or the company’s constitutional documents.
The owners generally cannot override the decision of the board if they are unhappy with any
management decision. Their main recourse is to replace the board through the process
provided for by the company’s articles and the Act. The owners, however, retain some powers
(generally exercisable by the members at a properly convened general meeting). These relate
to matters that pertain to the constitutional structure of the company, or which affect the
shareholders’ rights, or which require their intervention because of potential conflicts of interest
that the directors may otherwise face. For example, directors cannot issue shares or dispose of
the whole (or substantially the whole) of the company’s undertaking without prior approval of the
company given at a general meeting (sections 161 and 160). The owners may also amend the
memorandum or articles of association of the company and restrain the directors from acting
outside any stated objects of the company (section 25). Directors are also not permitted to be
paid any emoluments without the prior consent of a general meeting (section 169). In addition,
shareholders of unlisted companies have the right to commence a derivative action on behalf of
the company if the directors refuse to take action in relation to wrongs committed against the
company (section 216A). This is particularly useful where the company’s controllers themselves
or their associates are the wrongdoers.
Finally, the law also provides direct protection against the abuse of a controlling power, whether
it be by the board or the controlling shareholders. The key mechanism for this is to allow
aggrieved shareholders (who are more often than not minority shareholders) to seek redress
through the courts where they can show that the actions of the directors or majority
shareholders are discriminatory or unfairly prejudicial, or if the company has been run in an
oppressive manner or with disregard to their interests (section 216).
Directors’ appointments and duties
As mentioned earlier, the general power to manage the company is vested in the directors. It is
therefore important to have able directors to lead the company. While the law does not ask for
any substantial qualifications for a person to be a director, other than the requirement for such a
person to be of legal age and capacity, there are provisions that disqualify specified persons
from being directors and from directly or indirectly managing companies. The circumstances
whereby persons are disqualified relate mainly to situations where it is shown that the person is
untrustworthy or unable to manage the company or their own finances properly (see sections
148 to 149A and 154 to 155A). Members also generally have a say in who they wish to have as
a director, in accordance with the provisions of the company’s articles of association. In
addition, members of public companies have a right to remove the company’s directors,
regardless of the provisions in the company’s constitutional documents (section 152).
The law also specifies strict duties for company directors; these duties make them accountable
to the company and protect the company against an abuse of directorial power. Under the
common law these include:
 the duty to act with reasonable care, skill, and diligence
 the duty to act in good faith and in the interests of the company
 the duty to use powers for proper purposes
 the duty to avoid conflicts of interest
 the duty to retain discretions in the performance of their obligations to the company.
If a director breaches any of these duties they may be liable either for damages, should the
company suffer loss as a result of the director’s actions, or for an account of any gain or profit
that they may have obtained consequent to the breach.
The Companies Act also has provisions governing directors’ duties which more or less
correspond to their duties under the common law. Thus, under section 157 of the Act, directors
have to act honestly and exercise reasonable skill and diligence in the discharge of their duties.
They are also prohibited, under section 157(2) of the Act, from making improper use of
information, obtained in the course of their appointment, to gain for themselves or others, or to
cause loss to the company.
The Act also has rules governing specific corporate transactions to reduce the scope for abuse
of directorial power. These include provisions prohibiting loans and other forms of financial
assistance to directors, their family members, and director-related companies except in
specified circumstances (sections 162 and 163). There are also provisions which require
directors to disclose conflicts of interest (existing or potential), and provisions which require
shareholders to approve matters where such situations may arise. For example, section 156 of
the Act requires directors to disclose any transact ions and appointments to other offices which
may give rise to potential conflicts of interest. Criminal sanctions may be imposed where any of
the legislative provisions are breached.
Corporate disclosure and reporting and audit
The final aspect of legal regulation to be discussed here relates to the numerous corporate
disclosure and reporting requirements that the law places on companies. The reason for these
requirements is to enable shareholders and other stakeholders to access accurate and relevant
information in a timely manner for informed decision making. The Companies Act has provisions
governing proper maintenance and audit of accounting information (see Part VI of the Act), and
it is compulsory for listed companies to have properly constituted audit committees (section
201B) to oversee these processes.
Companies are also required to maintain various registers that are open to shareholders and
members of the public, as well as to file specified returns with the Accounting and Corporate
Regulatory Authority. They must also prepare an annual report and present the report and their
accounts for scrutiny by the shareholders. This provides shareholders with the opportunity to
assess and query the company’s (and management’s) performance. In addition, there are other
periodic and continuous corporate disclosure requirements imposed on publicly traded
companies by corporate legislation and the SGX (see, for example, Chapters 7 to 10 of the SGX
Listing Rules). These not only preserve the integrity of the securities market, but also keep
members and investors informed of major developments. Of particular note is section 203 of the
Securities and Futures Act, read together with the disclosure requirements under the SGX
Listing Rules, which makes it an offence to intentionally or recklessly fail to notify the exchange
of matters that are required to be disclosed, whether.
CODES AND BEST PRACTICE – THE SINGAPORE CODE OF CORPORATE
GOVERNANCE 2005
In addition to legislative and quasi-legislative regulation, codes and best practice also play an
important role in regulating corporate governance. Unlike the former, regulation under the latter
generally does not take the form of mandatory rules. Instead these serve as a guide, designed
to encourage voluntary practices that are aimed at giving stakeholders greater confidence in the
governance standards of the company.
The main source of best practice in Singapore is the Singapore Code of Corporate Governance
2005 (‘the Code’). While compliance with the Code is not mandatory, the SGX Listing Manual
requires listed companies to describe their corporate governance practices with specific
reference to the Code in their annual report. They must also disclose any deviation from any
guideline of the Code and provide an appropriate explanation for the deviation in their annual
report (SGX Listing Manual rule 710).
The Code contains 15 principles, supplemented by Guidelines and Commentaries, which relate
to Board Matters (Principles 1 to 6), Remuneration Matters (Principles 7 to 9), Accountability
and Audit (Principles 10 to 13), and Communication with Shareholders (Principles 14 to 15).
The objective is not to prescribe corporate behaviour in detail but to encourage companies (in
particular, listed companies) to adopt practices which aim to provide accountability while
creating long-term shareholder value, and to secure sufficient disclosure so that stakeholders
can assess the company’s governance practices and therefore respond in an informed manner.
The key practices encouraged include:
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having an effective board which is aware of its roles and responsibilities and which is
provided with access to the necessary information to perform these responsibilities
having a strong independent element on the board with no concentration of power in any
one person
having formal and transparent processes for board appointments, board performance, and
board and executive remuneration. This is to be facilitated by the appointment of
nomination and remuneration committees to oversee these matters
emphasising the importance of accountability and audit, and requiring the establishment of
audit committees and the internal audit function
having strong internal control processes in place
promoting greater disclosure for, and communication with, shareholders.
CONCLUSION
As mentioned at the outset, it is not possible in an article of this length to give a detailed account
of the various regulatory mechanisms in Singapore relating to all aspects of corporate
governance. It is hoped, however, that the snapshot presented here provides a starting point for
greater in-depth study of this topic.
Victor Yeo is associate professor at Nanyang Technological University, Singapore