Singapore: Consultation Paper on the Proposed Revisions to the Code of Corporate Governance ("Code")

(i) Structure of Code 

The Council recommends streamlining the Code to focus on key tenets of corporate governance and for more thoughtful and meaningful application. The requirements can be rationalised according to the following hierarchy of compliance:

(a) Singapore Exchange Listing Rules (Main Board and Catalist) (collectively, "SGX-LR")

Guidelines in the current Code which are in effect important requirements or baseline market practices are recommended to be shifted to the SGX LR for mandatory compliance.

(b) Code 

The Code will continue to apply on a comply-or-explain basis, with the expectations under the regime to be clarified to strengthen the emphasis on thoughtful and meaningful communication between companies and their stakeholders.

(c) Practice Guidance

To provide guidance to companies on compliance with the Code as well as set out best practices, the Council recommends the introduction of the Practice Guidance. The Practice Guidance complements the Code but is non-binding i.e. it will apply on a voluntary basis.

(ii) Key Recommendations

(a) Strengthen Director Independence

Shareholding Threshold

The Council recommends lowering the shareholding threshold in relation to determining director independence from 10% to 5%, and shifting this to the SGX-LR which will make it a mandatory requirement in determining independence. This will bring Singapore in line with similar thresholds in Hong Kong and Australia and also align with the definition of "substantial shareholder" in the Companies Act (Cap 50) and the Securities and Futures Act (Cap 289) of Singapore. 

To provide sufficient time for companies to adjust their board composition and source new independent directors, the Council recommends that a transition period of three (3) years be provided if the recommendation to lower the shareholder threshold is implemented.

Nine-year Rule on Director Independence

Under the current Code, the independence of any director who has served on the board beyond nine years from the date of his first appointment should be subject to a “particularly rigorous review” (“Nine-year Rule”). The Council proposes two options to address current issues of ambiguity related to the “particularly rigorous review” of the independence of independent directors who have served more than nine years. The first is to incorporate the Nine-year Rule in the SGX LR as a hard limit. The second is to subject the appointment of independent directors who have served beyond nine years to an annual vote to be approved by: (i) the majority of all shareholders; and (ii) the majority of non-controlling shareholders, and shifting this provision to the SGX-LR which will make it a mandatory requirement in determining independence of directors. 

Disclosure of Non-Controlling Shareholders' Vote on Appointment of Independent Directors

The Council recommends introducing in the Code a new provision for companies to separately disclose non-controlling shareholders’ votes on appointments and re-appointments of independent directors who serve less than nine years, on a comply-or-explain basis. This recommendation does not change the current way in which independent directors who serve less than nine years are appointed and re-appointed. In other words, the independent directors will continue to be subject to a vote by all shareholders and approved based on the majority vote of all shareholders. Even though the non-controlling shareholders’ vote is non-binding, the board is encouraged to take the feedback into account in the appointment and reappointment of independent directors. 

(b) Enhance Board Composition and Diversity

At least one-third of the Board to comprise of Independent Directors

The Council recommends shifting the current guideline for one-third of the board to comprise independent directors from the Code to the SGX LR. This sets the baseline requirements for all listed companies and reinforces the importance of minimum independent director representation on boards. 

Majority of the Board to comprise of Independent Directors, where Chairman is not independent

Where the board Chairman is not independent, independent directors play an even more important role as an effective check and balance mechanism. The Council recommends revising the current provision in place, for independent directors to comprise a majority of the board (instead of "half" of the board), where the Chairman is not independent, on a comply-or-explain basis.

Majority of the Board to comprise of directors who have no management or business relationships with the company

A new provision has also been recommended by the Council, for the board to comprise a majority of directors who have no management or business relationships with the company, on a comply-or-explain basis.

Board Diversity

There is growing recognition that board diversity is associated with improved corporate performance. The current Code requires the board and its committees to comprise directors who as a group, provide an appropriate balance and diversity of skills, experience, gender and knowledge of the company. The Council recommends adding “age” as one of the aspects of diversity for companies to consider, and for companies to disclose their board diversity policy and progress made in achieving the same. 

(c) Transparent Remuneration Practices

The Council considers that it is more important for companies to provide meaningful disclosures so that stakeholders can understand the alignment in the level and structure of remuneration of directors and key executives, to the companies’ long-term objectives, business strategy and performance. The recommended revision is for companies to disclosure the relationship between remuneration and value creation. 

The Council also recommends a revision to the Code for companies to disclose the names and remuneration of employees who are substantial shareholders or immediate family of substantial shareholders (in addition to employees who are immediate family members of a director or the chief executive officer, as in the current Code), where such remuneration exceeds S$100,000 during the year (revised from S$50,000 currently), in bands no wider than S$100,000 (revised from S$50,000 currently).

This article is produced by our Singapore office, Bird & Bird ATMD LLP, and does not constitute legal advice. It is intended to provide general information only. Please contact our lawyers if you have any specific queries.