The findings of the recently released GTI show that many firms still have much work to do.
EMILYN YAP 3 April 2009
The first results from the Governance and Transparency Index (GTI) are out. And while some larger companies did well, others put in just enough effort to meet minimum corporate governance standards. ‘The results confirmed that we have a mixed bag of companies in terms of governance and transparency,’ said Mak Yuen Teen, the co-director of the Corporate Governance and Financial Reporting Centre (CGFRC) at the National University of Singapore.
Launched by The Business Times and CGFRC, the GTI ranks companies based on their governance standards, financial transparency and investor relations. Five companies with good practices stood out from 677 firms, but ‘there is a general sense that many companies are still largely ticking the boxes’, Prof Mak noted.
The index is also sponsored by CPA Australia and supported by the Investment Management Association of Singapore.
Top five GTI scorers
The GTI covers companies that released annual reports between Jan 1 and Dec 31 last year. And those with a sizeable market capitalisation or global footprint have emerged ahead of the race. SingTel, SMRT Corp, Keppel Telecommunications & Transportation, Singapore Exchange and Keppel Corp took the five top spots.
According to Prof Mak, these five corporations generally have high-quality boards comprising a non-executive or independent chairman and a majority of independent directors. Overall, only about 20 per cent of companies studied have independent directors making up a majority on their boards.
The top companies also reported their annual results well ahead of the 60-day deadline, he said. In contrast, as many as 75 per cent of firms released their results only in the week before the deadline. In addition, the five top firms run comprehensive websites for investors, engage analysts and the media through briefings and give sufficient notice of annual general meetings.
‘The bigger companies especially are not competing in the Singapore national games; they are competing in the Asian or Olympic Games,’ Prof Mak explained. ‘They need to meet standards that global investors are used to expecting in companies in the most developed markets.’
The GTI reflects such standards as it incorporates recommendations from Singapore’s Code of Corporate Governance, listing requirements and international best practices.
While Prof Mak feels the five companies deserve praise for having the highest GTI scores, he was careful to differentiate the recognition from that conferred by other awards. Awards honour the best but ‘do little to motivate the not-so-good to do better,’ he said. On the other hand, the publication of the full GTI scores (see pages 14 and 15) could encourage even companies that did poorly to improve.
Prof Mak also urged the five firms to continue improving their corporate governance. ‘With the current crisis and the need to regain investor confidence, I think the bar will be raised further,’ he said.
Areas for improvement
Now, for the not so good news. The GTI results show that many companies follow corporate governance recommendations in form but not in substance. To pick them out, the GTI awards points for good practices and deducts points for questionable ones.
The Code says, for instance, that a board should examine its size and decide on one that is appropriate. ‘Most companies, even those with four board members, would say they have done so,’ Prof Mak said. The GTI however, is more specific and awards points only for boards with six to 11 members, a size deemed suitable for the proper discharge of duties.
Box-ticking also occurs when it comes to board appraisals. According to Prof Mak, many companies say they conduct this exercise, but few engage the help of an external party at least periodically. ‘A robust board appraisal is more than just using a generic questionnaire and asking mundane questions around board meetings,’ he explained.
In fact, only 56 per cent of companies disclosed the criteria used in board appraisals, while just 41 per cent revealed the process followed.
The GTI has also penalised several companies for granting stock options to independent directors. Prof Mak recommends instead that companies encourage them to use some fees to buy shares in the firms and keep the holdings until they leave the board, as SingTel has done.
Other common shortcomings include poor disclosure of board and senior management remuneration - just 3 per cent of companies reported their executive directors’ exact remuneration. There were also late announcements of stock option grants and long-serving independent directors on boards.
Bright spots
Of course, the corporate governance scene in Singapore is not all that dreary, and there are areas where companies go beyond the minimum standards. For instance, some earned bonus points for providing a comprehensive description of how they assess the independence of their directors. Some companies also set term limits for their directors.
At a time when corporate scandals have become all too common, the GTI results will hopefully push firms into tightening internal controls.
As Prof Mak suggested, investors, analysts and regulators should pay attention to companies ranked low on the GTI. ‘It does not mean that these companies will be your next scandals, but I would think that if they take a risk-based approach to investing or regulating, or if they are writing recommendations on companies, then those companies should receive more scrutiny,’ he said.
At the same time, investors should not view the GTI rankings as short-term stock recommendations. ‘We are not asking investors to buy companies which are high and sell companies which are low,’ he cautioned. ‘But if you were faced with two companies, both with what appear to be good business fundamentals but one does much better on governance and transparency, which one should you invest in for the long term?’
CPA Australia yesterday organised the CPA Forum 2009 to discuss key GTI findings. The discussion shed more light on the workings of the index for companies that are keen to improve their scores in future. The next issue of the GTI will cover companies releasing their annual reports between Jan 1 and June 30 this year - and the scoring system could be stricter.
Beyond Singapore, the GTI may prove useful overseas. ‘We think there are opportunities for the GTI to be taken to other countries which also want their companies to raise their standards,’ said Prof Mak.
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Keeping companies up to standard
The findings of the recently released GTI show that many firms still have much work to do.
EMILYN YAP
3 April 2009
The first results from the Governance and Transparency Index (GTI) are out. And while some larger companies did well, others put in just enough effort to meet minimum corporate governance standards. ‘The results confirmed that we have a mixed bag of companies in terms of governance and transparency,’ said Mak Yuen Teen, the co-director of the Corporate Governance and Financial Reporting Centre (CGFRC) at the National University of Singapore.
Launched by The Business Times and CGFRC, the GTI ranks companies based on their governance standards, financial transparency and investor relations. Five companies with good practices stood out from 677 firms, but ‘there is a general sense that many companies are still largely ticking the boxes’, Prof Mak noted.
The index is also sponsored by CPA Australia and supported by the Investment Management Association of Singapore.
Top five GTI scorers
The GTI covers companies that released annual reports between Jan 1 and Dec 31 last year. And those with a sizeable market capitalisation or global footprint have emerged ahead of the race. SingTel, SMRT Corp, Keppel Telecommunications & Transportation, Singapore Exchange and Keppel Corp took the five top spots.
According to Prof Mak, these five corporations generally have high-quality boards comprising a non-executive or independent chairman and a majority of independent directors. Overall, only about 20 per cent of companies studied have independent directors making up a majority on their boards.
The top companies also reported their annual results well ahead of the 60-day deadline, he said. In contrast, as many as 75 per cent of firms released their results only in the week before the deadline. In addition, the five top firms run comprehensive websites for investors, engage analysts and the media through briefings and give sufficient notice of annual general meetings.
‘The bigger companies especially are not competing in the Singapore national games; they are competing in the Asian or Olympic Games,’ Prof Mak explained. ‘They need to meet standards that global investors are used to expecting in companies in the most developed markets.’
The GTI reflects such standards as it incorporates recommendations from Singapore’s Code of Corporate Governance, listing requirements and international best practices.
While Prof Mak feels the five companies deserve praise for having the highest GTI scores, he was careful to differentiate the recognition from that conferred by other awards. Awards honour the best but ‘do little to motivate the not-so-good to do better,’ he said. On the other hand, the publication of the full GTI scores (see pages 14 and 15) could encourage even companies that did poorly to improve.
Prof Mak also urged the five firms to continue improving their corporate governance. ‘With the current crisis and the need to regain investor confidence, I think the bar will be raised further,’ he said.
Areas for improvement
Now, for the not so good news. The GTI results show that many companies follow corporate governance recommendations in form but not in substance. To pick them out, the GTI awards points for good practices and deducts points for questionable ones.
The Code says, for instance, that a board should examine its size and decide on one that is appropriate. ‘Most companies, even those with four board members, would say they have done so,’ Prof Mak said. The GTI however, is more specific and awards points only for boards with six to 11 members, a size deemed suitable for the proper discharge of duties.
Box-ticking also occurs when it comes to board appraisals. According to Prof Mak, many companies say they conduct this exercise, but few engage the help of an external party at least periodically. ‘A robust board appraisal is more than just using a generic questionnaire and asking mundane questions around board meetings,’ he explained.
In fact, only 56 per cent of companies disclosed the criteria used in board appraisals, while just 41 per cent revealed the process followed.
The GTI has also penalised several companies for granting stock options to independent directors. Prof Mak recommends instead that companies encourage them to use some fees to buy shares in the firms and keep the holdings until they leave the board, as SingTel has done.
Other common shortcomings include poor disclosure of board and senior management remuneration - just 3 per cent of companies reported their executive directors’ exact remuneration. There were also late announcements of stock option grants and long-serving independent directors on boards.
Bright spots
Of course, the corporate governance scene in Singapore is not all that dreary, and there are areas where companies go beyond the minimum standards. For instance, some earned bonus points for providing a comprehensive description of how they assess the independence of their directors. Some companies also set term limits for their directors.
At a time when corporate scandals have become all too common, the GTI results will hopefully push firms into tightening internal controls.
As Prof Mak suggested, investors, analysts and regulators should pay attention to companies ranked low on the GTI. ‘It does not mean that these companies will be your next scandals, but I would think that if they take a risk-based approach to investing or regulating, or if they are writing recommendations on companies, then those companies should receive more scrutiny,’ he said.
At the same time, investors should not view the GTI rankings as short-term stock recommendations. ‘We are not asking investors to buy companies which are high and sell companies which are low,’ he cautioned. ‘But if you were faced with two companies, both with what appear to be good business fundamentals but one does much better on governance and transparency, which one should you invest in for the long term?’
CPA Australia yesterday organised the CPA Forum 2009 to discuss key GTI findings. The discussion shed more light on the workings of the index for companies that are keen to improve their scores in future. The next issue of the GTI will cover companies releasing their annual reports between Jan 1 and June 30 this year - and the scoring system could be stricter.
Beyond Singapore, the GTI may prove useful overseas. ‘We think there are opportunities for the GTI to be taken to other countries which also want their companies to raise their standards,’ said Prof Mak.
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