The Singapore Exchange Regulation (SGX RegCo) published a public consultation paper proposing to amend the Listing Rules to impose a hard nine-year limit on the tenure of independent directors, removing the current two-tier voting rule. The SGX RegCo is also proposing mandatory disclosures of the actual amounts of the remuneration of each listed company director and chief executive officer.
The proposal includes a one-year transitionary period for companies to find suitable independent directors.
These proposals follow an independent review of Mainboard-listed companies’ compliance with the Code of Corporate Governance (the Code) disclosure obligations by KPMG Singapore and a study on long-serving independent directors by Nanyang Technological University.
Independent directors of listed companies (Issuer) on the Singapore Exchange play a valuable role by providing independent views to the shareholders of the company in areas such as, inter alia, financial reporting, nomination of directors, remuneration of the board and key executives, and interested person transactions.
The Code defines an independent director as one who is independent in conduct, character, and judgement, and has no relationship with the company, its related corporations, its substantial shareholders, or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director's independent business judgement in the best interests of the company.
The Listing Manual of the Singapore Exchange Securities Trading Limited (Listing Rules) requires an Issuer to have at least two independent directors that make up at least one-third of the Issuer’s board. The Code further requires independent directors to make up a majority of the board (if the chairman is not independent), the nominating committee, remuneration committee, and audit committee.
Board renewal is necessary for an effective board, as new independent directors are able to provide fresh ideas and independent opinion in decision-making. Under the current Listing Rules, independent directors who have, from 1 January 2022, served for an aggregate period of more than nine years (whether before or after listing) must be subjected to a two-tier shareholders’ vote by all shareholders and all shareholders excluding directors and the chief executive officer (CEO and their associates to continue serving as independent directors of the company.
Remuneration disclosures enable shareholders to assess whether remuneration is proportionate to the sustained performance and value creation of the company. The Code requires the names, amounts, and breakdowns of the remuneration of the directors, CEOs, and top five management personnel in bands no wider than SGD 250,000 (USD $176,700) and in aggregate the total remuneration paid to these key management personnel.
REVIEW OF THE NINE-YEAR RULE AND REMUNERATION DISCLOSURES
The SGX RegCo commissioned KPMG to perform an independent review of the Mainboard-listed companies’ compliance with the Code disclosures obligations. Additionally, a study on long-serving independent directors conducted by Nanyang Technological University was highlighted by the SGX RegCo.
The SGX RegCo found that the two-tier vote was extensively utilised. The study by Nanyang Technological University found that the two-tier vote was applied to 70% of 391 long-serving independent directors’ seats due for reelection and 73% of 172 long-serving independent directors’ seats not due for reelection, resulting in the reappointment of 98% of the long-serving independent directors.
The SGX RegCo is of the view that the extensive use of the two-tier voting rule to retain long-serving independent directors may be detrimental to board renewal and increases the risk that the independence of the board could become compromised.
The independent review by KPMG found that remuneration disclosures were inadequate. Out of 585 companies, only 35% of companies disclosed actual remuneration of directors and only 18% disclosed the actual remuneration of CEOs. Further, only 59% of companies reported directors’ remuneration in bands, while another 75% reported CEO remunerations in bands. The review found that the common explanation proffered for poor remuneration disclosures were concerns on competition, confidentiality, and sensitivity. The SGX RegCo is of the view that director and CEO remuneration should be transparent, especially since directors and CEOs owe a fiduciary duty to the company.
POTENTIAL RULE CHANGES ON INDEPENDENT DIRECTORS’ TENURE AND REMUNERATION DISCLOSURE
In light of the findings of the review and study by KPMG and Nanyang Technological University respectively, the SGX RegCo has published a public consultation paper proposing to amend the Listing Rules to include a hard nine-year limit on the tenure of independent board directors, removing the two-tier voting rule. The proposal includes a one-year transition period to provide companies with sufficient time to find suitable independent director candidates. After the transition period, long-serving independent directors would be redesignated as non-independent even though their appointments were previously approved by the two-tier vote.
The public consultation paper also proposes that the Listing Rules be amended to mandate the disclosure of the actual amount of director and CEO remuneration. Full transparency of such will enable shareholders to better assess whether remuneration is tied to a company’s performance and whether other matters, such as environmental, social, and governance factors, are taken into account.
FUTURE OUTLOOK FOR ISSUERS’ BOARD OF DIRECTORS
Issuers’ board of directors should be aware of the potential changes in the Listing Rules relating to independent directors’ tenure and remuneration disclosures. Issuers with long-serving independent directors who have been on the board for close to or more than nine years may consider making early preparations to find suitable fresh independent directors to be appointed in the future for compliance with the requirements under the Listing Rules and the Code.
Going forward, Issuers should also be aware that the disclosure of the names, amounts, and breakdown of remuneration of each Issuer’s directors and CEOs may be mandatory in future annual reports of the company.
*A solicitor of Morgan Lewis Stamford LLC, a Singapore law corporation affiliated with Morgan, Lewis & Bockius LLP