Published Date: 11 November 2016

"Effecting Good Governance with 'Comply or Explain'" - Closing Remarks by Mr Ng Yao Loong, Executive Director, Monetary Authority of Singapore, at the Singapore Institute of Directors' Launch of the Board Guidebook on 11 November 2016

Mr Willie Cheng, Chairman, SID,
Distinguished guests, ladies and gentlemen,

1   Thank you for inviting me to close today’s event. I would like to commend SID, PwC and the Review Panel for the hard work put into the newly launched Board Guide. The Board Guide can be seen as the “mother of all guides” as it provides an overview of the board’s responsibilities for all directors. I also enjoyed the panel discussions which touched on conformance vs. performance. I look forward to the release of the revamped guidebook for Audit Committees as well as a one-stop online guide for corporate governance (CG) by SID next year. 

2   Recently, Mr Ong Chong Tee, MAS Deputy Managing Director of Financial Supervision, said that it may indeed be timely to review our CG Code since the last review was in 2012.  Any review will need to carefully weigh the differing perspectives of different stakeholders. What we aspire to is a CG Code that is balanced, progressive and workable in practice. 

3   For the CG Code to be effective in practice, we have to go beyond written principles and guidelines. Perhaps it may also be timely for us to think about how the “comply or explain” regime can work better in Singapore. The concept of “comply or explain” recognises the need for proportionality and innovation; it allows companies to seek alternatives in achieving good governance instead of requiring unthinking compliance. 

4   But given the feedback on box-ticking and boiler-plate explanations, are we achieving this in practice?  If we are not careful, a few egregious or notorious deviations could potentially undermine wider public support for the whole concept of “comply or explain”. 

5   There are two key elements for “comply or explain” to work: (i) thoughtful commitment from companies to demonstrate good governance; and (ii) constructive engagement by shareholders.  When both elements exist, “comply or explain” can then work effectively as a market-based solution; companies explain their governance practices while shareholders engage companies, especially if explanations for deviations from the CG Code are unconvincing. Regulators can support such market discipline by creating a supportive environment for both companies and shareholders to engage.

6   In demonstrating a commitment to good governance, companies should disclose not just the fact of compliance, but also the substance of compliance. Good governance does not equal unthinking compliance with every guideline in the CG Code. Companies should understand the intent behind the principles in the CG Code and consider the best approach to meet them, taking into consideration their individual circumstances. And where there are deviations from the CG Code, companies should provide meaningful explanations that give useful insights to the board’s thinking, so that shareholders and other stakeholders can better understand the difficult decisions that boards have to make. While this may appear obvious, do we all have a common and agreed understanding of the elements that constitute a meaningful explanation? 

7   In this aspect, the UK Financial Reporting Council, the entity responsible for CG in the UK, has provided some insight. First, the explanation should set the context for the deviation; next, it should describe the mitigating actions and how it achieves the intent of the CG principle including addressing any additional risk due to this deviation; lastly, it should indicate whether this deviation is limited in time and when the company intends to comply with the CG principle. 

8   Shareholders too need to play their part; they have to engage constructively with boards, and help set the tone and expectation for the company’s governance practices. This includes understanding how companies are meeting the intent of the CG Code and engaging with boards. If shareholders are convinced that their companies have thought carefully about governance, there should be a higher level of trust – explanations for any specific deviations that might arise are therefore more likely to be acceptable. 

9   There have been initiatives in providing guidance for shareholders to do so. Just last week, an industry working group – of which SID is a member – has released a set of best practices to promote active stewardship by institutional investors. The Securities Investor Association Singapore (SIAS) has also issued reports to guide retail investors in their participation at company AGMs. This is to raise the quality of engagement between shareholders and boards. I hope that boards will be receptive to such engagement efforts.

10   In conclusion, meaningful explanations of both compliance and deviations, and constructive dialogues are vital in building trust and confidence between companies and their shareholders. SID as the national association of company directors has a key role to help shape the CG culture and practices that work for Singapore. Let us work together to continually raise the standards of corporate governance in Singapore.

11   Thank you.