It is not too often that regulations for corporate governance get a big systemic revamp.

Just this month, the Monetary Authority of Singapore (MAS) issued a revised Code of Corporate Governance for all listed companies, together with related amendments to the Listing Rules of the Singapore Exchange (SGX).

In addition, a more detailed and voluntary Practice Guidance was introduced as part of the comprehensive suite of enhancements to the governance landscape for listed companies in Singapore.

The current change is the third revision since the corporate governance code was first promulgated in 2001, with the last revision done some six years ago.

The latest changes are comprehensive and will see the code streamlined through a net reduction of three principles and 31 provisions.

Beside ratifying specific issues like board diversity, director remuneration and stakeholder engagement, the main thrust of the amendments centres on director independence and board composition.

Effective boards

This is well and good as the most critical governance issue at this moment is probably to mold effective boards whose interests are aligned with those of the stakeholders, including shareholders.

Yet in unveiling the new framework proposed by the Corporate Governance Council, MAS Deputy Managing Director (Financial Supervision) Mr Ong Chong Tee also flagged that “there may be some concerns that some of the principles in the code are subject to interpretation and gaming”.

Indeed this possible playing to the rules but adroitly finding hidden loopholes or passively ignoring full compliance points to the difficulty in regulating governance in the corporate sector.

While the Singapore Governance and Transparency Index (SGTI), a national barometer of corporate governance in Singapore, is at an all-time high of 56.3, up from 52.3 last year and from 33.9 when it was first started 10 years ago, there is still much room for improvement.

In the summative findings of the SGTI, the overall level of compliance amongst the multifarious items in the various broad sections of assessment is actually not high.

This is despite the fact that compliance is required under the code unless the company is able to explain why it does not do so.

The new corporate governance code makes it clear that non-complying companies must “explicitly state and explain how their practices are consistent with the aim and philosophy of the principle in question”.

These explanations – usually done publicly through annual reports or company announcements – must be comprehensive and meaningful, in contrast to previous codes where there was no mention of the compliance approach and it was  left to SGX to manage the compliance.

While the principles and provisions in the new code are clear, the fundamental problem is that compliance is not so straightforward.

An SGX study of 545 mainboard-listed companies in July 2016 conducted by KPMG rated each of them based on the quality of their disclosures on the 85 requirements of the previous code.

While 52 per cent of the companies scored above 60 per cent for disclosures, 35 per cent were between the scores of 50 per cent and 60 per cent. Shockingly, 14 per cent of companies were below the 50 per cent score.

Not ‘black-or-white’

Compliance is thus not a binary “black-or-white” matter. As the maxim goes, there are many “shades of grey” in between.

Take for example, the disclosure for board diversity where there must be an appropriate balance and mix of skills, knowledge, experience, and other aspects like diversity and age.

Some companies may just make general claims that they have diverse boards while others provide vague details which make it difficult to determine whether there is compliance.

One common area of non-compliance pertains to disclosure of the remunerations of individual directors and the CEO.

In these cases, it is easy to determine if there is compliance.

Yet, non-complying companies tend to offer vague explanations why they do not comply. Some cite confidentiality while others simply claim these are the decisions of their boards.

As compliance falls under the listing rules, SGX would have to monitor and mandate compliance. But the work is voluminous given the many principles and provisions of the code. It will not be feasible for SGX to comb through over 700 listed companies and to single out errant ones.

A better way out is to build a broader culture of good practices. The SGX Fast Track programme to recognise companies with strong governance standing and compliance track record is a good start by rewarding such companies with prioritised clearances for corporate submissions such as circulars, requests for waiver and applications for share placement.

The Corporate Governance Council has done an excellent review of the old code and made comprehensive recommendations at this critical juncture of corporate development for Singapore.

MAS, as regulator in-charge, did the right thing in approving the changes, after factoring inputs from an extensive public consultation exercise.

It is appropriate that a key proposal arising from the current review is the formation of a standing Corporate Governance Advisory Committee that will promote good corporate governance practices.

Even with the practical difficulty, a topmost priority of this committee is to relook the compliance situation. Working with SGX, it should engage companies to ensure adequate understanding of the mechanics of compliance. It is more effective to tackle the problem at source rather than after non-compliance is detected.

Compliance is at the very heart of the corporate governance landscape especially since it is subject to “interpretation and gaming”. Proper enforcement will determine the effectiveness of the new reforms.