Published Date: 30 November 2005

Singapore Institute of Directors, 7th AGM Luncheon

Speech by Mr Heng Swee Keat, Managing Director, Monetary Authority of Singapore, Challenges for the Boards of Listed Companies

Mr Chew Heng Ching, Chairman of the Singapore Institute of Directors
Mr John Lim, President of the Singapore Institute of Directors
Distinguished guests, Ladies and Gentlemen


1   I am delighted to join you here at the SID 7th Annual General Meeting Luncheon. I thank you for the honour of addressing this very distinguished audience.  

2   In the face of accelerating change and intensifying competition, the demands on the Board and Management of companies to meet new challenges are multiplying. The differential in the rewards between successful and mediocre performance has sharpened. I will focus my remarks on the three challenges of managing change, managing risks and managing the leadership bench, and the role that SID can play.

Managing Change

3   Companies go through different phases in their growth and in the process, have to manage many changes.  The first is the change in the nature of ownership.   Entrepreneurial firms usually start off as small outfits, often family-owned.  The initial seed capital usually comes from the savings of founders, their friends and relatives.  As the firm expands, the founders may seek additional funding from banks and venture capitalists.  At some point, a growing firm may decide to raise capital from the public market and seek a listing.   The experience, however, is that many newly listed firms have found this change to be difficult. Often, founders fail to appreciate the significant differences between a privately held firm, where one enjoys a high degree of autonomy and flexibility, and that of a listed firm, where the rules of public disclosures and corporate governance apply. 

4   Smaller firms, in particular, find themselves spending a significant amount of management attention and resources on complying with various rules.  These often come at a time when they are also in a growth phase, which is why they sought to raise new capital in the first place. The conflict in priorities is often not well managed.  Yet it is critical that publicly listed firms get their governance right, if they want to maintain the trust and confidence of investors. Only then can they continue to tap the capital market for their future growth.

5   The second change facing many listed companies in Singapore is regionalization.  Many companies find Singapore a good home base to start new ventures and test new concepts.  To grow, they have to expand to countries in the region and beyond.  This is where they face the next major hurdle - that of charting unfamiliar waters in rapidly evolving markets. The legal, taxation and regulatory regimes among the economies in Asia differ, adding to compliance costs.  More importantly, market conditions, consumers' expectations and business cultures are likely to differ from Singapore in significant ways.  Managing this new level of complexity requires skills, resources and attention. 

6   The third change is that of strategic orientation.   A small firm usually starts off in an entrepreneurial, challenger mode.  By relying on speed and nimbleness, it can attack the incumbents by focusing on specific niches. However, as it grows in size and complexity, it too becomes an incumbent, and is vulnerable to attacks.   As a small firm, it can use disruptive change to grow successfully.  As it grows, it risks being disrupted.  Clayton Christensen's series of books on disruptive innovation shares many useful insights on this process.   There is an old Chinese saying that when the tree is big, it attracts the wind.   Indeed, seemingly small changes in the environment can have a major impact on the firm.   For example, small teams of software wizards are now using Internet telephony to attack the revenue base of big incumbent telecommunications companies.

Managing Risks

7   The second category of challenges is that of managing risks.  Most companies have indicated that risks have multiplied, and their impact has magnified. Certainly, recent prominent corporate collapses all around the world have alerted us to the importance of internal controls to minimise the risk of fraud and to ensure the integrity of the reported financial figures.   At a 2004 Audit Committee Roundtable organised by the KPMG Audit Committee Institute, two thirds of participants believed that the recent high-
profile financial reporting scandals could have been avoided if the Audit Committee had been more diligent.  But in the face of ever-greater financial and operational complexity, the Audit Committee, and the Board as a whole, could find themselves not having the technical expertise to effectively carry out their roles.

8   Risks are not confined to fraud and the integrity of financial statements. Operational risks have risen. The threat of sudden disruptive events such as terrorism attacks or avian flu pandemic have focused attention on the importance of Business Continuity Management.

9   The challenge is for the Board and management to better understand and manage the risks of the enterprise.  Yet, surprisingly, in a recent survey[1] of Board practices in Singapore, it was found that only 53 per cent of listed companies have a formal risk identification and recording system. Of these companies, only slightly more than half conduct risk monitoring on an annual basis.  There is a clear need for Singapore listed companies to put in greater efforts in building up robust risk management procedures.

Managing Leadership Depth 

10   For a company to thrive and provide shareholders returns, the breadth and depth of the leadership bench in the company is decisive.   As a company's strategy evolves to meet the changing business environment, demands on the leadership will certainly change.  The right skills for a newly growing firm might not be the right ones for one competing in a more mature market.  Helping the CEO to grow the depth and breadth of the leadership bench, and to manage leadership transition are important responsibilities of the Board.  

The Responses of Board

11   In short, Boards need to play key roles in working with management to respond to challenges, especially in these three areas.    Indeed, the effectiveness of the Board and its governance process can affect the valuation of a company. The Singapore Corporate Governance Survey of Institutional Investors[2] found that the composition and quality of the Boards was a key factor influencing investment decisions.

12   But to be effective, the Board itself needs a process of renewal and upgrading of capabilities.

13   The Code of Corporate Governance empowers the Nominating Committee of a listed company to make recommendations to the Board on all Board appointments.  It is very important for Boards to establish effective Nominating Committees which can draw up the competency profiles required of Board members, and help identify the right candidates.   The composition of the Board needs to reflect the requisite skills mix for both strategic thinking and operational execution.  The Board needs to have members who are attuned to the range and diversity of the products and markets that the company serves, and the risk profiles and mitigating measures for each key line of business.    In particular, Board members need to be able to commit the time and effort necessary to learn and contribute effectively to the Board.  This is especially so if the candidates hold multiple directorships.

14   With the increasing demands and responsibilities placed on directors, companies world-wide are faced with a shrinking pool of qualified and willing candidates.  In Singapore, the constant lament is that we do not have a deep enough talent pool from which to select Board members, especially independent Directors.    One can appreciate this difficulty for small listed firms, but it is not insurmountable.  For instance, listed companies can tap into the Singapore Institute of Directors' database of members who are willing and able to serve as independent directors.  In tapping regional market for growth, a natural extension is tapping the regional talent to add depth and diversity to the Board.  Companies with regional aspirations of operations should seriously consider how to absorb and integrate talent around us.   

15   Just as we demand that CEOs develop their management teams, Boards need to consider how Board members themselves can keep abreast of the changes in their external environment and the potential impact on the company's business. Many company directors are themselves full-time executives or may sit on the Boards of multiple companies. Busy directors find that they do not have time to keep up with the workings of the business and to fully digest the information they are confronted with in their Board papers, much less to have the time to learn more about the broader industry trends that will determine the future of the company.

16   I note with some concern that in the Singapore Board of Directors Survey last year, it was found that 28% of listed companies believe that no training is needed for their directors. This mindset must change.  Even the most qualified Directors need to be constantly updated on regulatory and market developments. 

Role of SID

17   In this regard, the Singapore Institute of Directors (SID) can play a key role.  SID's charter is to promote the professional development of directors and corporate leaders, and encourage the highest standards of corporate governance and ethical conduct.

18   Early this year, SID started a new course specially tailored for directors of newly-listed companies. This is indeed timely given the growing number of IPOs on the Singapore Exchange, and the difficult transition that I mentioned earlier. SID has also organized, in partnership with PriceWaterhouseCoopers, a series of workshops on risk management.  

19   SID can serve as a focal point to stimulate learning and exchange of ideas on corporate governance, compliance and risk management.  I believe these will feature more and more prominently in the agenda of companies in the coming years. Certainly in the financial services industry, these are core issues that all firms are grappling with. Beyond these, given the pace of change, good stewardship will require us to look more and more at managing strategic changes and developing leadership depth. It may be timely for SID to stimulate more discussions on these issues. 

20   There is a deep pool of resources in Singapore and in this region for SID to tap on leading practitioners, specialists and thought leaders in academia.   As our companies regionalise, it would be very heartening to see SID becoming a key body in Asia that promotes effective governance and leadership, and becoming a focal point for interaction among the best corporate minds in Asia. On that note, I wish you many more successful years ahead. Thank you.


[1] The fourth Singapore Board of Directors Survey 2004 is a joint effort of the Singapore Institute of Directors, SGX, Egon Zehnder International, NUS and PWC.

[2] The Survey of Institutional Investors was conducted by PwC, the Investment Management Association of Singapore (IMAS) and NUS.