30 August 2018

On 6 August 2018, the Monetary Authority of Singapore (“MAS”) issued the revised Code of Corporate Governance (“2018 CG Code”) which has incorporated the recommendations by the Corporate Governance Council (“Council”). The 2018 CG Code supersedes and replaces the Code of Corporate Governance that was issued in May 2012 (“2012 CG Code”).

The 2018 CG Code applies to annual reports of issuers listed on the Singapore Exchange Securities Trading Limited (“SGX-ST”) covering financial years commencing from 1 January 2019.

Important requirements or baseline corporate governance practices stipulated in the 2012 CG Code will be shifted to the SGX-ST Mainboard Listing Rules and Catalist Listing Rules (collectively, “SGX-ST Listing Rules”), rendering compliance with these requirements mandatory. On 6 August 2018, Singapore Exchange Limited (“SGX”) issued amendments to the SGX-ST Listing Rules to incorporate these requirements. The SGX-ST Listing Rules amendments will take effect on 1 January 2019 with the exception of those relating to board composition. A longer transitional period of three years is provided for such changes so that issuers have more time to make board composition adjustments.

Background information

By way of background, in February 2017, MAS established the Council to review the 2012 CG Code. On 16 January 2018, the Council released a consultation paper which sets out its recommendations to revise the Code (“Consultation Paper”). These recommendations aim to support sustained corporate performance and innovation, and strengthen investor confidence in Singapore capital markets. On 6 August 2018, the Council issued its response to feedback received from the Consultation Paper.

A summary of the key changes to the SGX-ST Listing Rules and the 2018 CG Code is set out below.

Streamlined 2018 CG Code

The streamlined 2018 CG Code focuses on key tenets of corporate governance. The Council is of the view that a more concise and less prescriptive Code will encourage thoughtful application of the Code and a shift away from a box-ticking mindset. The corporate governance requirements applicable to an issuer listed on SGX-ST are streamlined as follows:

  • SGX-ST Listing Rules: Important requirements or baseline corporate governance practices are incorporated in the SGX-ST Listing Rules for mandatory compliance;
  • CG Code Principles: The SGX-ST Listing Rules require an issuer to comply with 13 Principles of the 2018 CG Code which set out broadly accepted characteristics of good corporate governance;
  • CG Code Provisions: The “comply-or-explain” regime continues to apply to the Provisions of the 2018 CG Code. Where an issuer’s practices deviate from any of the 2018 CG Code Provisions, it must, in its annual report:
    • explicitly state the Provision from which it has varied;
    • explain the reason for variation; and
    • (as a new disclosure requirement) explain how the practices it had adopted are consistent with the intent of the relevant CG Code Principle; and
  • Practice Guidance: Prescriptive or less essential details in the 2012 CG Code are set out in the Practice Guidance and will apply to issuers on a voluntary basis. The Practice Guidance complements the 2018 CG Code by providing guidance on the application of the 2018 CG Code Principles and Provisions and setting out best practices for issuers.

Tests for independence of directors

  • SGX-ST Listing Rules - Two circumstances where directors are deemed not independent: With effect from 1 January 2019, issuers are required to apply the following objective and baseline tests setting out circumstances which deem a director not to be independent:
    • a director who is employed by the issuer or its related corporations for the current or any of the past three financial years; and
    • a director who has an immediate family member who is employed or has been employed by the issuer or its related corporations for the past three financial years, and whose remuneration is determined by the remuneration committee of the issuer.
  • SGX-ST Listing Rules - Two-tier vote on independence of directors beyond nine years: With effect from 1 January 2022, the SGX-ST Listing Rules will provide that a director who has been a director for an aggregate period of more than nine years (whether before or after listing) will not be considered an independent director (“ID”) unless his appointment as an ID is approved in separate resolutions by the majority of: (1) all shareholders; and (2) all shareholders, excluding shareholders who also serve as the directors or chief executive officer (“CEO”) of the issuer (and their associates). The two-tier vote will be valid for a term of the ID appointment (up to three years). The directors and the CEO of the issuer and their respective associates must not accept appointment as proxies unless specific instructions as to voting are given. Prior to 1 January 2022, the corresponding Guideline 2.4 of the 2012 CG Code will continue to apply.
  • CG Code Provision - Definition of directors’ independence: The 2018 CG Code defines an “independent” director as one who is independent in conduct, character and judgment, and has no relationship with the issuer, 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 issuer. The shareholding threshold in determining a director’s independence is reduced from 10% to 5%, to align with the definition of “substantial shareholders” in the Securities and Futures Act.
  • Practice Guidance: The remaining tests for directors’ independence in the 2012 CG Code are set out in the Practice Guidance to provide issuers with flexibility in applying these tests while adhering to the overarching principle-based test in the 2018 CG Code Provision.

Board composition

  • SGX-ST Listing Rules - Board committees to be set up by issuers:
    With effect from 1 January 2019, issuers must establish one or more committees as may be necessary to perform the functions of an audit committee, a nominating committee and a remuneration committee, with written terms of reference which clearly set out their authority and duties.
  • SGX-ST Listing Rules - IDs to make up at least one-third of the Board: With effect from 1 January 2022, an issuer will be required to ensure that IDs must comprise at least one-third of the board of directors of the issuer (“Board”). If an issuer is not able to meet this composition requirement following any retirement or resignation of an ID, the issuer should endeavour to fill the vacancy within two months even though a longer grace period of no more than three months is allowed for the issuer to fill the vacancy. Prior to 1 January 2022, the corresponding Guideline 2.1 of the 2012 CG Code will continue to apply.
  • CG Code Provision - IDs forming majority of Board if Chairman not independent: The 2018 CG Code stipulates a stricter provision for IDs to form a majority of the Board (from “at least half” in the 2012 CG Code) where the chairman of the Board (“Chairman”) is not independent.
  • CG Code Provision - NEDs forming majority of Board: The 2018 CG Code contains a new provision that the majority of the Board should be made up of non-executive directors (“NEDs”).

Appointment/re-appointment of directors

  • SGX-ST Listing Rules - Directors to be re-nominated and re-appointed at least once every three years: With effect from 1 January 2019, all directors of an issuer must submit themselves for re-nomination and re-appointment at least once every three years.
  • SGX-ST Listing Rules - Disclosure of more information about directors when they are appointed/re-appointed: With effect from 1 January 2019, when a candidate is proposed to be appointed/re-appointed as a director at a general meeting, an issuer is required to provide the information relating to the candidate as prescribed in the SGX-ST Listing Rules in the notice of meeting, annual report or relevant circular distributed to the shareholders prior to the general meeting for the appointment/re-appointment of the director. The outcome of the shareholder vote must be announced.

Disclosures relating to directors

  • SGX-ST Listing Rules - Enhanced disclosures relating to directors:
    With effect from 1 January 2019, the annual report of an issuer must:
    • identify all directors, including their designations (namely, independent, non-executive, executive, etc.) and roles (as members or chairmen of the Board or Board committees);
    • disclose the relationship between the Chairman and CEO of the issuer, if they are immediate family members.

Training for directors

  • SGX-ST Listing Rules - Training for first-time directors: With effect from1 January 2019, a director who has no prior experience as a director of an issuer listed on SGX-ST must undergo training in the roles and responsibilities of a director of a listed issuer as prescribed by SGX and the issuer will be required to confirm that. If the nominating committee is of the view that training is not required because the director has other relevant experience, the basis of its assessment must be disclosed.  

Internal audit / internal controls

  • SGX-ST Listing Rules - Issuers to establish and maintain effective internal audit function: With effect from 1 January 2019, issuers will be required to establish and maintain on an ongoing basis, an effective internal audit function that is adequately resourced and independent of the activitiesit audits.
  • SGX-ST Listing Rules - Enhanced disclosures in annual reports and offer documents on adequacy and effectiveness of issuers’ internal controls and risk management systems: With effect from 1 January 2019, the Board must comment on the adequacy and effectiveness of the issuer’s internal controls (including financial, operational, compliance and information technology controls) and risk management systems in the issuer’s annual report and prospectus. A statement on whether the audit committee concurs with the Board’s comments must be provided. Where material weaknesses are identified, they must be disclosed together with the steps taken to address them.

Diversity policy

  • CG Code Provision - Disclosure of diversity policy: An issuer should disclose their Board diversity policy and progress made in achieving the Board diversity policy (including any objectives set by the issuer) in its annual report.

Disclosure of remuneration

  • CG Code Principle - Enhanced disclosures on remuneration: Issuers must be transparent on their remuneration policies, including the relationship between remuneration, performance and value creation.
  • CG Code Provision - Disclosure of remuneration of employees who are substantial shareholders or immediate family members of substantial shareholders: Issuers should disclose in their annual reports the names and remuneration of employees who are substantial shareholders of the issuers or immediate family members of substantial shareholders of the issuers
    (in addition to employees who are immediate family members of a director or the CEO), where such remuneration exceeds S$100,000 during the year (revised from S$50,000), in bands no wider than S$100,000 (revised from S$50,000).

Stakeholder engagement

  • CG Code Principle - Balancing needs and interests of material stakeholders: The 2018 CG Code contains a new Principle (and related Provisions) which requires the Board to adopt an inclusive approach by considering and balancing the needs and interests of material stakeholders, as part of its overall responsibility to ensure that the best interests of the issuer are served.

Reference materials

The following materials are available on the MAS website www.mas.gov.sg:

2018 CG Code

Response to feedback received on recommendations of the Council

Amendments to SGX-ST Listing Rules

The following materials are available on the SGX website www.sgx.com:

 

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