Director's Criminal Liability - Singapore Institute of Directors

The Directors’BULLETINISSUE 5 • 2011The Official Newsletter of Singapore Institute of Directors MICA (P) 075/05/2011Director’sCriminalLiability

Singapore Institute of DirectorsMISSIONSTATEMENTTo promote the professionaldevelopment of directorsand corporate leaders andencourage the highest standardsof corporate governance andethical conductTHE INSTITUTE’S OBJECTIVES ARE:• To be the national association of company directors for the local businesscommunity. The SID works closely with its network of members,professionals such as accountants and lawyers, and the authorities toidentify ways to uphold and enhance standards of corporate governance.• To act as a forum for exchange of information on issues relating tocorporate governance and directorship in Singapore. The SID playsa leading role in holding discussions and providing feedback to theauthorities on matters of concern.• To organise and conduct professional training courses and seminars tomeet the needs of its members and company directors generally. Suchcourses aim to continually raise the professional standards of directors inSingapore by helping them raise their effectiveness through acquisitionof knowledge and skills.• To regularly publish newsletters, magazines and other publications toupdate members on relevant issues, keeping them informed of latestdevelopments. These publications also serve as reference materials forcompany directors.• To be responsible for the discipline of members. The SID has drawn upa code of conduct for directors in Singapore setting out the standardsto ensure they discharge their responsibilities dutifully and diligently.

FROM THEEDITORWelcome to the last issue of the Directors’ Bulletin for 2011,although by the time you get this, we would be in 2012! As noted inthe 4th issue of the Bulletin, the state of the global economy remainsuncertain; but thankfully things did not take a turn for the worst. Letus hope that 2012 will remain upbeat despite murmurings. I shallleave you to read the excellent insights provided by the Chairmanof the Institute in his message on the 2011 events. But happeningsaside, the purpose of highlighting them is once again to reminddirectors that they are functioning within difficult times, whenestablishing that they have indeed exercised due care and skill canseemingly be difficult.Perhaps for that reason, this final issue of the Bulletin looks at theduties and responsibilities of directors with a fresh pair of eyes. Tostart off the series of articles, we have Professor Walter Woon and MrYap Chee Keong sharing their insights as to why criminal sanctionsare not the most apt way to deal with a director who has failed inhis duties and obligations. A line which captures the thoughtsthroughout comes from Professor Woon who says - “One does notgo to jail for the sins of others.”Until such times as the legislation in Singapore is tweaked, directorsmust nevertheless remain mindful of their duties and obligations.Their duties and obligations range from the mundane such as filingof annual returns to the more complex of reviewing and signing offon disclosures to be made to regulators (if one is a director of a listedcompany) to perhaps the perceived hardest function, i.e. exercisingdue skill and care. The articles in this issue of the Bulletin endeavourto highlight when and how directors trip up; and provide suggestionson how they can avoid such problems.Associate Professor Victor Yeo’s article on Directors’ Duties inMaking Corporate Disclosure is an absolute must read. It provides asuccinct explanation of the issues at hand and then attempts to guidethe director through the muddle of ensuring that they have exercisedcare in signing off on the disclosures that are made.AP Yeo’s article is aptly followed by Mr Yeo Wee Kiong’s articledealing with the different shades of fraud. A man of many talents,Wee Kiong in this article provides a practical insight into the twomandates of needing to meet the needs of the market and yet bear theinterest of the company in mind. Whilst often the two do meet, thereare many a times that the twain simply cannot meet. Understandingthis involves a certain mastery, as well as humility in accepting thatthe needs of the market must override that of the company. Still ondisclosures, a quick insight into the Air Ocean case is provided a teamof partners from Allen & Gledhill.An article which has previously appeared in the Singapore LawGazette was included to allude to the possible changes coming aboutin the months or years ahead with the proposed changes to Code ofCorporate Governance as well as the Companies Act.Following from the articles in this issue, there will be more ondirector duties and responsibilities, particularly in a downturn in thefirst issue of the 2012 Bulletin.The articles in this issue aside, this issue also includes an additionalStatement of Good Practice issued by the Institute. This Statementof Good Practice deals with share pledging by directors who are alsocontrolling shareholders.Separately, in the last issue of the Bulletin, I provided a quicksummary of the Institute’s Annual Conference. In this issue, we haveincluded a more detailed summary, as well as information on andthe results of the voting on 3 critical questions following each panel.What is more intersting is the fact that over 40% of the respondentsfelt that the current liabilites of directors are not fair relative to theirroles and responsibilities. This response could be seen as supportingthe view that there should be less criminal sanctions.There are also photos galore for you to look at. The Institute hasalready started planning for the 2012 Directors Conference. If youhave any feedback or insights to share, please do get in touch with thesecretariat. Do look out for more information on the Conference inthe months to come.The Institute also held its 13th Annual General Meeting in November.The meeting was well attended. Two new Council Members wereelected during the Meeting, namely Mr Soh Gim Teik and Mr KevinKwok. A brief write-up on each of the two new council membersappear at page 49. We welcome them on aboard.Wishing everyone a Happy Holiday season, and look forward toworking with and discussing corporate governance and directorrelated issues.Finally, a note of thanks to all the contributors to this issue of theBulletin.Kind regards,Kala AnandarajahEditor2

CHAIRMAN’SMESSAGEBy the time you received this Bulletin, we would have left 2011behind and started on the new year.2011 has in many ways, been a truly dramatic year, a year of historicchanges and events some of which could not even have been thoughtpossible or anticipated twelve months earlier.The Arab spring uprising which erupted in mid-December 2010 inTunisia has so far resulted in the overthrow of Zine El Abidine BenAli in Tunisia, Hosni Mubarak in Egypt, Muammar Gaddafi in Libyaand Ali Abdullah Saleh in Yemen. At the time of writing, on-goingprotests are continuing in Syria, Jordan, Egypt and perhaps elsewhereand it is anyone’s guess as to what further changes 2012 will bring inthe Middle East and North Africa region.Nearer home, leadership changes have taken place, in Thailand withthe election of a new Prime Minister Yingluck Shinawatra, in Japan,with yet another new Prime Minister Noda Yoshihiko, in Myanmarwith a newly elected leader, and lastly in December in North Korea,with the pronouncement of a new leader Kim Jong Un, followingthe death of his father Kim Jong Il. Although Pyongyang hasdefiantly declared that there will be no change in its policies, there isnevertheless some uncertainty and some hope in the new leadership.On the natural disaster front, the Asia-Pacific has had more thanits fair share. Starting with the 6.3 magnitude quake which hitChristchurch in New Zealand in February which destroyed largenumbers of commercial and residential buildings and killed almost200 people, this was followed by the triple disaster in Japan. A8.9 magnitude quake hit its north-eastern coast on March 11 andtriggered a tsunami that destroyed much of the surrounding coastaltowns there and eventually resulted in the nuclear power plantaccident in Fukushima.In October, Thailand suffered its worst flooding in 50 years whichaffected its capital and a third of its provinces. This month longflooding caused work stoppages and substantial losses at many multinationalmanufacturing operations located in the country. Flooddamages are estimated at more than S$50 billion.On the economic and financial front, the US economy saw weakgrowth and continued high unemployment at just below 10 percentalthough this appears to have improved in recent months.Europe remains the weak spot with many high level summitdiscussions but as yet no long term solution to the Euro-zone debtcrisis. This crisis has already seen the resignation of Prime MinisterGeorge Papandreou of Greece in November followed in quicksuccession by Prime Minister Silvio Berlusconi of Italy and thedowngrading of credit ratings in several Euro states including France.The Euro debt crisis will be with us as we start the new year withopinions still divided as to whether the Euro will survive.In contrast, Asia in general has fared better with China continuingwith a slightly subdued but still high single digit growth and S.E.Asia as a whole, averaging about 5 percent in 2011.At home, a growth of 4.8 percent was achieved in 2011 while a lowerrate of between 1.0 and 3.0 percent has been projected for 2012,amidst continued global economic uncertainty and a policy decisionto slow the inflow of foreign workers which is expected to adverselyimpact our growth.On the political front, General Elections in May was followed by thePresidential election in August, both of which saw an unprecedentedpolitical awakening, especially among the younger generation, andwhich has been described as a “political transition”. The robustexpression of diverse views by netizens and the results of bothelections have led to a review of current and past Governmentpolicies and an increase in focus on housing, public transport, healthcare and education, issues.On the Corporate front, 2011 saw the announcement of acomprehensive review and revision of the Corporate GovernanceCode 2005, the Companies Act and changes to the SGX ListingManual. Approval of the revised CG Code and amendments tothe Companies Act is expected to be announced in first half 2012.Comments on both proposals were published in the last issue of thisBulletin.We urge directors, particularly of listed companies, to carefully reviewtheir existing board practices and processes in the light of these newregulations and guidelines and to make changes where appropriate toensure that their Corporate Governance practices are not only in thebest interest of their company and all its shareholders/stakeholdersbut also in line with global best practices.The last month of 2011 also saw the public disagreement betweenSGX and a Mainboard listed company, China Sky Chemical Fibre.Without commenting on the dispute itself, I would, however, liketo call our members’ attention to an MAS statement on the casewhich was published in the Straits Times of 31 December reminding3

SID Governing Council 2011/2012Chairman: Mr John Lim Kok MinFirst Vice-Chairman: Mr Reggie TheinSecond Vice-Chairman: Mr Adrian Chan PengeeTreasurer: Mr Basil ChanCouncil MembersMr Keith Tay Ms Yeo Lian Sim Mr Willie ChengMr Boon Yoon Chiang Ms Kala Anandarajah Mr Andy Tan Chye GuanMrs Yvonne Goh Dr Ahmad Mohd Magad Mr Kevin KwokMr Yeoh Oon Jin Mr Daniel Ee Mr Soh Gim TeikMr Lim Hock SanMr Yeo Wee KiongSeated (from left): Mr Boon Yoon Chiang, Mrs Yvonne Goh, Mr Basil Chan, Mr Reggie Thein, Mr John Lim Kok Min, Mr AdrianChan Pengee, Ms Yeo Lian Sim and Mr Lim Hock SanStanding (from left): Mr Yeoh Oon Jin, Mr Daniel Ee, Mr Keith Tay, Dr Ahmad Mohd Magad, Mr Yeo Wee Kiong, Mr Andy Tan ChyeGuan, Mr Kevin Kwok, Mr Sovann Giang (Executive Director) and Mr Willie ChengNot in picture: Ms Kala Anandarajah and Mr Soh Gim Teik5

COVER STORYDealing WithDirectorsWho Fail InTheir Duties &ResponsibilitiesInterview WithProfessor Walter WoonAnd Practicing DirectorYap Chee KeongIn June 2011, the Steering Committee for the Review of the Companies Act(“Steering Committee”) issued its Report on proposed changes to the CompaniesAct (“Report”). This Steering Committee, along with its five working committeesbeneath it, had been formed to look into reform as may be necessary in theareas of directors’ duties, shareholders’ rights and meetings, capital maintenance,accounts and audit, and administration of companies. An article titled “UpComing Potential Changes Facing Directors In Singapore” at page 19 of thisBulletin touches on some of the proposals that have been put forth. One of thekey issues that surfaced for discussion concerned whether directors should becriminally penalised for all types of breaches of duties and responsibilities. Thisis a vexed issue.Given the heightened focus ondirectors, and the seemingly increasingresponsibilities that they face, theInstitute felt that it was useful to getan insight into what the views of twothought leaders were. The Institutespoke with Professor Walter Woon andMr Yap Chee Keong, both of whomwho need no introductions, for theirperspectives.Each of the two thought leaders providea lucid, and in an easy to understandmanner, perspective as to why criminalpenalties are simply not appropriate –“One does not go to jail for the sins ofothers.”. It is a view that is difficult toargue with as it is simply impossible fordirectors to be alert to and be aware ofeverything that goes on in the company.As such, it is just not appropriate thatthey be penalised criminally. One ofthe pet peeves of the editor is wheredirectors are penalised for the failure tofile an annual return. Whilst this is a6

“One does not go to jail for the sins of others.”.It is a view that is difficult to argue with as itis simply impossible for directors to be alert toand be aware of everything that goes on in thecompany. As such, it is just not appropriate thatthey be penalised criminally.serious matter, this is an administrativefunction that should be dealt withthrough a civil penalty at the very worse.It could even be tied to disqualificationin the case of recalcitrant directors.However, it ought not to be one forwhich a criminal sanction ought to beimposed. It is a different thing wherethe director has been negligent, turneda blind eye, or simply fraudulent, as thetwo interviewees note.The process of transformation fromone of a criminal regime to that of acombination of civil and criminal willbe a long one, but certainly one to lookforward to.1. The issue of subjecting directorsto criminal liabilities is a difficultone. It was revisited recently by theCompanies Act Review Committee.What are your views on this?Yap Chee Keong (“YCK”): This isa very complex subject. As I am not alawyer, I can only offer my views frommy own perspective and from a businessperspective.My personal view is that criminalliabilities should be imposed only ondirectors who commit an act/omissionwith criminal intent (e.g. fraud,dishonesty etc.). Sometimes, a directormay breach his or her duties as adirector with no fraudulent or dishonestintention such as inadvertent breach orlack of due care. Hence, it is my viewthat in such a case, no criminal liabilitiesshould be imposed on that director.Walter Woon (“WW”): Let us beclear about what we mean by “criminalliabilities.” These are fines and jailsentences. The prevailing attitude whenthe Companies Act was drafted wasthat only criminal penalties would besufficient to deter non-compliance withthe Act. Thus, section 407(1) providesthat failure to comply with any provisionof the Act is an offence.This is outdated.Not every non-compliance need bepunishable with imprisonment or fine.There are practical difficulties whenclassifying non-compliance as an offence.First, the Attorney-General’s Chambersdoes not have the resources to bringevery case to court, which means thatin many cases people get away with notcomplying with the statute. Second, theburden of proof in criminal proceedingsis higher - the prosecution must provethe offence beyond reasonable doubt.Third, criminal proceedings do notcompensate the company for any losscaused by errant officers.2. Directors are the ultimate guardiansof the affairs of the Company. Assuch, should they not be criminallyliable for any non-compliance in theCompany? Why?WW: The directors are ultimatelyresponsible for the good governance ofa company. But this does not mean thatthey are liable for everything that goeswrong. The bigger the company, themore delegation of responsibility therehas to be. As a general rule, a director isonly legally liable if (a) he approved anact, knowing it to be an offence; (b) heacquiesced in a conduct that amountsto an offence; or (c) he was negligent innot exercising adequate supervision andcontrol over employees and officers.Criminal liability is always personal.One does not go to jail for the sins ofothers. If a director fails to adequatelysupervise, say, the finance managerand criminal breach of trust occurs,the director can be liable only ifhe was personally negligent. It is amisconception to believe that directorsare liable for everything that happens toa company.YCK: The civil courts should beempowered with discretionary powersto deal with the factual differences ineach case before deciding on the finalremedies that are appropriate. Forexample, Australia has a civil penaltyregime for directors who fail to exercisedue care and diligence. However,criminal sanctions are not imposedon the directors. The fact that suchdirectors can also be exposed to othershareholders’ civil action, with itsattendant reputational impact, shouldprove to be a great enough deterrent andpunishment for the breach without theadded criminal stigma.My second point is that the liabilitiesof the directors of a company shouldcommensurate with and be aligned withtheir roles and responsibilities.1. The role of the board of a companyis that of a supervisory nature.It is the CEO and his or her keymanagement that should be directlyresponsible for managing andrunning the business.2. The Companies Act does not makeany distinction between IndependentDirectors (IDs), Non-executiveDirectors (NEDs) and ExecutiveDirectors (EDs). Consequently,under the Companies Act, theliabilities of IDs, NEDs and EDsare the same. This does not reflectthe business reality that IDs andNEDs, unlike EDs, are not involvedin the day-to-day managementof the company. This distinctionbecomes even more important withthe application of Singapore Codeof Corporate Governance which7

COVER STORYThe directors are ultimately responsible for thegood governance of a company. But this doesnot mean that they are liable for everything thatgoes wrong. The bigger the company, the moredelegation of responsibility there has to be. As ageneral rule, a director is only legally liable if (a)he approved an act, knowing it to be an offence;(b) he acquiesced in a conduct that amounts to anoffence; or (c) he was negligent in not exercisingadequate supervision and control over employeesand officers.defines an ID as someone who hasno relationship with a company orits officers. As someone who is notdirectly involved in the day-to-dayrunning of the company, an ID orNED does not have access to thesame information as an ED or theCEO.3. Ironically, as the law now stands, theCEO and his or her key managementteam who are directly responsible forrunning and managing the companydo not have the statutory duties andliabilities which apply to directors.3. Should directors be at leastcriminally liable for certain criticalroles they play? What should these be?WW: It is impossible to generalise interms of roles. In principle, a directorshould be criminally liable when heknowingly does an act which causes lossto the company, eg, misappropriatingthe company’s property. However, thisdoes not mean that criminal liabilty isnot appropriate where no loss is caused.For example, a director may deliberatelysuppress information about his family’sinterest in a transaction; a fine wouldbe in order. Criminal liability fornegligence is more problematic. Itshould be confined to cases of egregiousfailure to act, eg, not paying anyattention to a company’s affairs so thatloss is caused.Walter WoonYCK: As said above, my personal viewis that criminal liabilities should only beattached to breaches that are criminal innature e.g. fraud, dishonesty etc.4. What would be the preferredapproach to ensure directors performtheir duties and responsibilities vis-aviscompanies?WW: There must be a spectrum ofsanctions to ensure that not onlydirectors but also other senior corporateofficers like the CEO perform theirroles adequately in the governance ofcompanies.First, imprisonment is appropriatewhere there is dishonesty causing lossto the company or to its creditors. Theprivilege of limited liability is dangerouswhen the officers of a company aredishonest.Second, in some cases, obligationsshould be enforced by a fine, eg, nondisclosureof interests in corporatetransactions. The fine need not beimposed in criminal proceedings, whichwould involve a trial in court. In manyinstances, an administrative penalty maybe more efficient, eg, for filing offences.Third, it should be made clear in thenew legislation when a breach of the Actgives the company the right to sue thedirector or officer for loss caused to it.We should not rely entirely upon thePublic Prosecutor and ACRA to enforcestandards of corporate behaviour.Fourth, in an appropriate case aperson should be disqualified frombeing a director or participating in themanagement of a limited-liability entitylike a company. This is to protect thepublic from dishonest or irresponsiblepersons who abuse the privilege oflimited liability.YCK: It is my personal opinionthat continual training is importantfor any director. There are alsomany good publications to providesufficient guidance to any director.One publication I would recommendis “ACRA & I : Being An EffectiveDirector”.An alternative to criminal liability is civilliability regime. This regime is adoptedby Australia and does not criminalisedirector’s failure to exercise due careand diligence. Such a framework, whilstproviding sufficient deterrent to thedirectors including reputational impact,does not unduly punish the directorwith the added social stigma that acrime has been committed (such recordmay also affect such a director’s futurebusiness and / or regulatory clearances).Last but not least, there is no substitutefor ethics.5. Are there specific areas thatdirectors are responsible for whichshould definitely be subjected tocriminal liability?WW: The clearest case for criminalliability is where there is actualdishonesty causing loss to the companyor its creditors. Criminal breach oftrust is covered by the Penal Code,corruption by the Prevention ofCorruption Act. But there are instanceswhere a director may act dishonestlywithout contravening the Penal Codeor Prevention of Corruption Act, eg,by diverting business to himself andhis associates to the detriment of thecompany. Similarly, a course of businessmay fall short of cheating within themeaning of the Penal Code, but it may8

Clearly, where a director has abdicated hisresponsibilities, the case for criminal penalties isstronger. This might not mean imprisonment,but a fine would be appropriate where a directordeliberately shuts his eyes to malfeasance in thecompany.still amount to a fraud on the creditors,eg, racking up debts when there is noreasonable prospect of ever paying them.YCK: As said above, my personal viewis that criminal liabilities should only beattached to breaches that are criminal innature e.g. fraud, dishonesty etc.6. Would the imposition of civilpenalties be a preferred alternative? Ifso, what level should civil penalties beset at?WW: Civil penalties would be analternative. However, these should becomplementary to criminal penalties.The level should be commensurate withthe damage caused and the need to deterothers from behaving irresponsibly. Allsuch limits are arbitrary; there has tobe a review mechanism to ensure thatthe penalty is sufficient to provide adeterrence. Otherwise, inflation willreduce the deterrent value of the penalty.YCK: The courts should be empoweredwith discretionary powers to deal withthe factual differences in each case beforedeciding on the remedies or penaltiesthat are appropriate.7. Would it be appropriate to saythat where directors have moreresponsibilities to perform, such aswhilst sitting on the nominatingcommittee or the audit committee,they should be subjected to criminalliability where they have beennegligent?WW: As indicated above, criminalisingnegligence is more controversial thanmaking dishonest behaviour criminal.In general, a person should not go to jailWalter Woonfor being negligent in the context of acompany; it is not like killing someoneby negligent driving. However, going tojail is not the only criminal penalty. Afine is equally a criminal penalty.All directors, whether they have aspecialist role or not, are expected to payreasonable attention to the company’saffairs. What is reasonable is a questionof fact, to be answered by reference tothe director’s role, his experience andhis knowledge. Thus, what may bereasonable for a non-executive directormay be inadequate for an executivedirector. More is expected of directorswho are entrusted duties like being onan audit or compensation committee.YCK: The Nominating Committee(NC) and the Audit Committee (AC)are board committees, with theirauthorities delegated by the board. Suchcommittees usually comprise a majorityof IDs. Furthermore, the minutes ofthe meetings of these committees andthe decisions made by these committeesare usually circulated to the board. Assuch, to impose more liabilities on themembers of these committees does notseem equitable.8. Should directors be subjected tocriminal liability when they havebasically turned a blind eye to theirresponsibilities?WW: Clearly, where a director hasabdicated his responsibilities, the casefor criminal penalties is stronger. Thismight not mean imprisonment, buta fine would be appropriate where adirector deliberately shuts his eyes tomalfeasance in the company.YCK: The courts should be empoweredwith discretionary powers to deal withthe factual differences in each case beforedeciding on the final remedies andpenalties that are appropriate. Whethersuch a neglect of duties tantamount tocriminal acts should be a matter for thecourts to decide based on the facts ofeach case.9. Should executive directors facea greater likelihood of criminalliabilities than non-executivedirectors? Or should all directors betreated equally in this regard?WW: As explained above, what may bereasonable for a non-executive directormay not be reasonable for an executivedirector. Say that one of the company’straders turns rogue and involves thecompany in liabilities that run into thetens of millions. A non-executive directormight be excused for not noticing thatsomething is amiss, especially where therogue trader has covered his tracks. Itwould be much harder for an executivedirector supervising the trader to pleadthat he should similarly be excused fornot discovering the fraud. This does notmean that the executive director is alwaysresponsible; just that more is expected ofhim. No one would reasonably say thatan alternate director should be equallyresponsible for the malfeasance of therogue trader as the CEO. Clearly, theCEO (who is paid infinitely more) has ahigher burden to discharge.10. In the event there are no criminalliabilities for any violations bydirectors, how can director behaviourbe regulated?WW: It is not likely that there willbe no criminal penalties at all. Therecommendation of the SteeringCommittee was that the provisionsof the Act should be examined todetermine whether contraventionshould be punishable as a offence, andif so, whether a fine would be adequaterather than imprisonment.YCK: First of all, there is a large body ofcommon law, statutes and publications9

COVER STORYto provide sufficient guidance to anydirector.An alternative to criminal liability is civilliability regime as adopted by Australiafor directors who fail to exercise duecare and diligence. The fact that suchdirectors can also be exposed to othershareholders civil action, with itsattendant reputational impact, shouldprove to be a great enough deterrent andpunishment for the breach without theadded criminal stigma.Even in a civil liability regime, directorscan be subject to shareholders suitor they can be debarred from futuredirectorships. These should prove tobe sufficient deterrent to regulate theconduct of directors without the addedpenalty of criminalising the act.11. How can a balance between overpunishment and yet ensuring propercare and skill is exercised by a directorbe achieved? Surely some form ofregulation is required?WW: It is self-evident that regulation isneeded. Leaving it to the conscience ofbusiness people to do the right thing isnot practical. Not every contraventionof the Act need be an offence, but thatdoes not mean that there should be nopenalty for breaching the provisions ofthe legislation. Dealing specifically withcare and skill, negligence that causes lossAn alternative to criminal liability is civil liabilityregime as adopted by Australia for directorswho fail to exercise due care and diligence. Thefact that such directors can also be exposed toother shareholders civil action, with its attendantreputational impact, should prove to be a greatenough deterrent and punishment for the breachwithout the added criminal stigma.to the company exposes the directorto a civil suit by the company forcompensation. In the most egregiouscases (eg, deliberately shutting one’seyes to wrongdoing), a criminal penaltyis appropriate - in other words, a fine.Disqualification from directorship mayalso follow.YCK: As explained earlier, there isno disagreement that some formof regulation/ penalty is necessarydepending on the facts. Debarment forfuture directorships is another possiblepenalty.12. As a director, what are yourpersonal views as to how directorsshould be regulated? What changes,if any, would you like to see inthe regulatory regime relating todirectors?Yap Chee KeongWW: The main change, already advertedin the Steering Committee’s Report, isto ensure that contravention of the Actis not automatically an offence. Thisrequires the legislative draughtsmanto consider in each case whether thebreach of a provision is serious enoughto warrant a fine or imprisonment. Thedesired outcome is to reduce the numberof offence-creating sections considerablyand streamline them so that they forma coherent whole. The underlyingrationale for criminal penalties should bespelt out clearly so that business peopleare left in no doubt what is acceptablebehaviour in a corporate context.YCK: Please refer to my responses toQuestions 1 and 2.Professor Walter Woon, SC, is Dean, Singapore Institute of Legal Education andDavid Marshall Professor of Law, Law Faculty, National University of Singapore.His former positions include being Attorney-General; Solicitor-General; Member,Presidential Council for Minority Rights; Board Member, Monetary Authorityof Singapore and a Nominated Member of Parliament. Professor Woon hadalso served as Singapore’s Ambassador to Germany, Greece, Belgium, EuropeanCommunities, Luxembourg, the Netherlands and the Holy See.Mr Yap Chee Keong is an independent non-executive director of several publiclisted companies, and chairs the audit companies of some of these companies.He is an accountant by training and previously worked as the chief financialofficer and in other senior management roles in several multinational and listedcompanies.10

FEATURESDirectors’Duties InMakingCorporateAnnouncementsBy Victor YeoAssociate ProfessorNanyang Business SchoolNanyang Technological UniversityIntroductionMany events may affect this price of a company’s securities, and consequentlyrequire the board to consider making an appropriate announcement explaining theimpact of such events on the company. Recent unfortunate incidents pertainingto natural disasters and war provide good examples of how the occurrence ofevents may cause concern on the part of investors on the impact which such eventsmay have on a company’s operations and the price of its securities. Even eventspertaining to the company’s management or shareholders, such as the health andwell-being of the company’s key personnel, disputes amongst controlling parties,investigations by the authorities on the conduct of key executives and rumoursconcerning these may need to be clarified by way of a corporate announcement.While the regulatory framework (inparticular Chapter 7 of the SGX ListingManual read together with section 203of the Securities and Futures Act) placesa legal obligation on listed companies tocomply with disclosure requirements,the decision on whether, and if so,the manner by which announcementsconcerning the company shouldbe made rests with the board.Consequently, directors (individually aswell as collectively) may also be taken totask where there are lapses in compliancewith disclosure obligations. It may thusbe timely to re-examine the duties whichdirectors owe in connection with themaking of corporate announcementsand to consider some practical stepswhich may be taken to assist directors inthe fulfillment of these duties.Key Legislative ProvisionsOf relevance in this regard are two keyprovisions – one from the CompaniesAct and the other from the Securitiesand Futures Act – which give a legal11

FEATURESimpetus for boards to properly complywith the disclosure requirements underthe SGX Listing Manual.Section 157 Companies ActSection 157 of the Companies Actrequires directors to act honestly andto use reasonable diligence in thedischarge of their office. A director wholeaves it to his fellow board members tofinalise and release an announcementor directors who fail to arrange for anecessary announcement may be held tobe in breach of this provision. Directorscould equally be held liable for failingto appropriately or sufficiently assessthe proper scope of disclosure even if anannouncement is decided to be made.The errant directors may be fined, havea disqualification order made againstthem or even sent to prison.In deciding whether or not a directorhas failed to use reasonable diligence,the court will measure the actions ofthe directors against what is expectedgenerally of directors in a similarposition. It will also take into accountthe specific experience and expertisewhich the directors in question holdthemselves out to have or bring withthem to the board. Such directors areexpected to exhibit the same level of skillwhich may be expected of reasonablepersons having similar knowledge orexperience. Whilst this may imposeheavier burdens on professionals andothers with expertise in a particular fieldwho are appointed as directors (nonexecutiveor otherwise), one shouldremember that it is often the case thatsuch directors are appointed to boardsprecisely because of their expertise.They may accordingly be asked to beara correspondingly heavier burden inmonitoring developments within theirrespective fields of expertise, and, inthe context of the making of corporateannouncements, use this expertise inmonitoring developments and decidingwhether or not any announcementsshould be made.Section 157 of the Companies Act requiresdirectors to act honestly and to use reasonablediligence in the discharge of their office. A directorwho leaves it to his fellow board members tofinalise and release an announcement or directorswho fail to arrange for a necessary announcementmay be held to be in breach of this provision.This is not to say, however, that directorscannot rely on information or adviceprovided by others to assist them inperforming their duties. The CompaniesAct was amended in 2004 to specificallyprovide that directors are allowed torely on information or advice providedby employees, professional advisors andexperts and other directors in respectof matters which are within that otherdirectors’ designated authority. The dutyowed by directors in relying on suchother persons may in these circumstancesbe limited to ensuring that they havereasonable grounds for believing that thepersons on whom they are relying on forinformation and advice are, in the caseof employees, reliable and competent inrelation to the matters concerned andin the case of professionals and experts,within such person’s competence. Ofcourse, the directors have to still act ingood faith, make proper inquiry wherethere are circumstances which call forthis and should not have any knowledgeof facts which may indicate that suchreliance may not be warranted.Section 199 Of SecuritiesAnd Futures ActThe other key provision which directorsshould keep in mind is section 199 ofthe Securities and Futures Act. Thisprovision makes it an offence for anyoneto make any statement or to disseminateany information which is materiallyfalse or misleading that is likely to eitherinduce the subscription, sale or purchaseof securities or affect the price ofsecurities. Liability attaches only if themakers of the statement either makes itwithout caring whether the informationstated is true or false or knows or oughtreasonably to have known that theinformation states is false or misleadingin a material particular.Should directors decide to make anyannouncement, whether in responseto an SGX query or to provideconfirmation or denial of a spreadingrumour or otherwise, they are expectedtherefore to at least apply their mindsin trying to ascertain the truth of anystatements made. Half-truths andexaggerations may also be materiallymisleading. Where there is suspicionthat the information may be pricesensitiveand materially misleading,directors should take additional painsto satisfy themselves of the truth ofthe matter and consider rephrasing therelevant announcement where necessary.Practical StepsHere are some practical steps which, itis suggested, could be a guide for listedcompanies:• the board should be familiar withthe company’s local and foreignoperations and risk factors whichmay affect the company. This willenable board members to apply theirminds to the potential impact ofunforeseen events and developmentsas they occur and to seek clarificationfrom management on these mattersto decide whether an announcementmay be necessary;12

• the board should be providedwith, and have complete access to,information concerning the matterswhich may directly or indirectly affectthe company as and when such eventsoccur. An effective and comprehensivecorporate communications policy,which all key executives and managersshould be familiar with, would go farin assisting boards in this regard;• board members should remaincontactable at all times. This shouldnot be difficult to achieve with thecommunications technology availabletoday. Should there be any situationwhere this is not practical (such aswhere a director is due to undergo amajor medical operation), the rest ofthe board should be informed andinstructions be given for decisions tobe made in the directors’ temporaryabsence;• board members should ensure thatno inadvertent disclosure is madeof matters that are confidential innature, may cause the company tolose its competitive advantage or mayotherwise compromise the company’sinterest upon disclosure. Eachsubstantive announcement should bemade only after careful deliberationand with proper justification for eachdecision. One key considerationwould be the materiality and thecontext of the disclosure.• board members should considerwhether they are able to honestlyattest to any statements put forwardin all draft announcements and satisfythemselves as to the veracity of thesources of information on whichthey are basing the statements to seewhether they can reasonably rely onsuch sources or whether additionalinquiry may be necessary. Directorsshould not be hasty and rush toannounce before carefully consideringall aspects and the consequences ofmaking such disclosures. Where timeis needed to confirm certain facts orclarify aspects of the announcement,directors should consider whethera holding announcement, a tradinghalt or an extension of one alreadyin place may be necessary to allowdirectors enough time to obtain theseconfirmations and clarifications; and• the board should endeavour torespond without undue delay withtheir views on draft announcementswhich are prepared in response to SGXqueries or price-sensitive events andneed to work closely with the partiespreparing the announcements toensure that the intended informationto be announced is accurately reflectedin the announcement drafted.Key Purpose = Level PlayFieldOne of the main purposes of havingrules requiring adequate disclosure isto ensure a “level playing field” andequal access to information by bothcurrent stakeholders and prospectivestakeholders. It is always a judgementcall as to when to announce and howmuch to announce. For directors,this call may sometimes be difficult tomake as the facts and circumstances ofthe case at hand may involve issues ofconfidentiality or matters which haveyet to be fully investigated. The overallduty of a director is to act in the bestinterests of the company on whoseboard he sits. Sometimes, the interestsof the company may necessitate thekeeping of an event or occurrenceoutside the public’s eye and this maycomplicate the assessment of whether ornot there is a duty to make immediatedisclosure and keep shareholdersinformed under the circumstances.A proper balance needs to be struckand it is the duty of the directors toachieve the right balance. This mayrequire some flexibility and finesse incalibrating company announcementsto ensure that appropriate informationis disseminated to shareholders so thatdirectors are in compliance with theirdisclosure obligations and, at the sametime, are preserving the best interests ofthe company. Directors have to exercisetheir best judgment and approachmatters with commercial sensitivity andsensibleness, especially when the issuesbeforehand are complex.The making of accurate corporateannouncements via SGXNET may besaid to be a fundamental pillar of ourdisclosure based regime for securitiesregulation in Singapore. Boards shouldtherefore take pains to ensure thatthis mechanism serves its purposeto efficiently and effectively provideinvestors with access to informationon the company’s state of affairs whilstsafeguarding the company’s bestinterests.In deciding whether or not a director has failed touse reasonable diligence, the court will measurethe actions of the directors against what is expectedgenerally of directors in a similar position. It willalso take into account the specific experience andexpertise which the directors in question holdthemselves out to have or bring with them tothe board. Such directors are expected to exhibitthe same level of skill which may be expected ofreasonable persons having similar knowledge orexperience.13

FEATURESPublicDisclosureWhen BoardsEncounterActs Of FraudBy Yeo Wee KiongDirectorDrew & Napier AndCouncil MemberSingapore Institute Of DirectorsIntroductionRecently, in hearing a case involving an inaccurate announcement by a listedcompany, a Singapore court sentenced a non-executive independent director to acustodial sentence, setting our Singapore corporate sector buzzing over the accuracyand immediacy of public disclosures. Have these become more demanding? Arethere still justifications for delaying public disclosures? Governance laws areunchanged except that our courts now lean towards custodial sentences to punishculpability: but heavy practical difficulties are faced by non executive directorssuddenly confronted with management wrong-doing.Demands Of AccuracyOur law in general requires publicdisclosures to be accurate. In thewords of the Singapore Exchange inAppendix 7.1 Part IX 25(a) and (c) ofits listing manual, public disclosures areto be “factual, clear and succinct” and“balanced and fair”. In the Securities& Futures Act, section 199 requiresaccuracy by making it an offence foranyone to make any statement or todisseminate any information which ismaterially false or misleading that islikely to either induce the subscription,sale or purchase of securities or affect theprice of securities.In the said recent trial, based on itsfindings of facts, the court held thatcertain directors made an announcementthat was false and misleading, whichwas a breach of the standards ofaccuracy that our laws demanded. Sucha lack of accuracy, solely on its own,is not sufficient to lead to a personalconviction. The safety net to directorsunder our law is that, even if one failsto be accurate in an announcement ordisclosure, liability attaches only if themakers of the statement either make itwithout caring whether the informationstated is true or false or knows or oughtreasonably to have known that theinformation stated is false or misleading.14

It further requires a finding that themakers of the statement knew or oughtto know that the announcement theymade was false or misleading.. Clearly,our laws on the accuracy required inpublic disclosures remain unchanged.So if there is a lesson from this trial, itis that any director, including any nonexecutivedirector, involved in severeculpability can be given a custodialsentence when found guilty.Demands Of ImmediacyBoards of listed companies oftenencounter the issue of immediacy ofpublic disclosure of an event, alongwith the related issue of whetherdisclosure of such event can bejustifiably delayed or withheld. In thewake of the recent case, what concernssome boards is whether these demandshave changed. Allegations or actualinstances of management wrong-doingare not as uncommon as one hopes. Ifa board comes across such an event, ispublic disclosure required to be madeimmediately without exception? Canthe board justifiably delay or withholdpublic disclosure?Fraud By ManagementLikely Requires ImmediatePublic DisclosureA guide to the corporate events likelyto require immediate disclosure isfound in Rule 703 of the SGX ListingManual. These events, not beingexhaustive, are joint ventures, M&A,dividends, contracts won or lost,purchase or sale of assets, new productsor discoveries, change in control,change in management, materialborrowings, litigation, disputes, etc.Rule 703 requires that these events be“significant” to qualify for immediatedisclosure. By “significant”, it meansthat the event itself is significant, and/or its consequences have a significantimpact on the listed company.When management commits asignificant wrong-doing or a fraud,Our law in general requires public disclosuresto be accurate. In the words of the SingaporeExchange in Appendix 7.1 Part IX 25(a) and (c)of its listing manual, public disclosures are tobe “factual, clear and succinct” and “balancedand fair”. In the Securities & Futures Act,section 199 requires accuracy by making it anoffence for anyone to make any statement or todisseminate any information which is materiallyfalse or misleading that is likely to either inducethe subscription, sale or purchase of securities oraffect the price of securities.the likelihood that there are significantconsequences is higher. For instance,it can lead to a significant change inmanagement, a loss of a significantcontract, a significant deteriorationin near term earnings or significantlitigation with other parties and so on,many of which are events already listedas requiring immediate disclosure inRule 703. Clearly, a significant fraudin itself or one which can lead tosignificant consequences is likely torequire immediate disclosure as set outin Rule 703.The Needs Of The MarketAnd The Interests Of TheCompanyIn Singapore’s disclosure-basedregime, boards have a duty of timelydisclosure to ensure that the markethas the information needed to preventa false market in their securities fromarising. Corporate insiders thereforeneed to be discerning as to the natureof confidential information. Someinformation is highly significant andhas to be immediately disclosed as themarket has a urgent need to know.Other information, less significant, maybe disclosed later or at the next earningsreport. Together, such informationcan be regarded as price sensitiveinformation. Then there is another typeof information, which companies keepsecret to better pursue their corporateobjectives, which may be prejudicedby leakage. Director’s duties of goodfaith and to act in the best interest ofa company and its shareholders wouldjustify them keeping such informationsecret so as to further their corporateobjectives. Such information is oftencommercially sensitive information.The difficulty for boards arises becauseboth price sensitive and commerciallysensitive information overlap from timeto time with each other.No listed board would over-discloseas it would hurt its company’s abilityto compete or achieve its corporateobjectives. Neither would any listedboard pursue its corporate objectivesby holding back on all information andignoring its duty of timely disclosure tothe market. Clearly, a board has to strikea balance and not breach any of the twoduties. A board has to balance the needsof the market and the interests of itsbusiness.In Rule 703 on immediacy of disclosure,the Stock Exchange would also require usto “balance the needs of the market andthe interests of the issuer having regardto the principle on which the listing ruleis based”. The Stock Exchange goes onin Rule 703 to describe three situationsor conditions which when present allow15

FEATURESa board to delay or withhold immediatedisclosures. First, when “a reasonableperson does not expect the informationto be disclosed”- for example, if suchdisclosure prejudices the ability of the listedissuer to achieve its corporate objectives.Second, when the “information” canbe kept “confidential”, where the issuercontrols the use of the information orwhen no one can use that information totrade in the shares. In this regard, unusualtrading activity would suggest that theinformation is no longer confidential.Third, where the information is of aparticular type - for example, when it isan “incomplete proposal or negotiation”,or it is “information of a suppositionalnature or insufficiently definite”, or itis “information generated for internalmanagement purposes”, or “tradesecrets”.Mere Allegations Not ActualWrong DoingAs a start, a board must first distinguishmere allegations from actual or highlyprobable wrong-doing. Allegationscan surface through poison letters orwhistle blowing complaints which, ifvague and anonymous, can be of “asuppositional nature or insufficientlydefinite”. Allegations may be uncoveredby routine internal audits ordered by anaudit committee which would be still ofa “suppositional nature or insufficientlydefinite” until more forensic investigationis completed. At the same time, internalaudits could also uncover information“generated for internal managementpurposes”, which can be kept confidentialuntil the uses of the information expandbeyond its original purpose. In mereallegations, a board can justify a delayin public disclosure to investigate theallegations confidentially. As allegationsof fraud carry criminal implications,boards are likely to proceed quietlyuntil a sufficiently clear and certain caseemerges. Over time, investigations andaudit forensics, poison pen letters orcomplaints may yield specific details,naming accomplices, dates and sums,with culpability a rising and seriousprobability. They will then no longer beof a “suppositional nature or insufficientlydefinite” and they become more clearlyevents of wrong-doing or fraud.Varying Shades Of FraudEvents of management fraud maysurface as mere allegation or as a minorwrong. Over time, they may graduallybe rejected as baseless, or found asminor. Other fraud events, initiallyassessed as minor, could be found afterlonger investigation to be serious fraudwith a significant impact. Then thereare fraud events that hit suddenly andunexpectedly with varying magnitude,taking boards by surprise. The suddennature of management fraud is usuallybecause they are deliberately hidden,not easy to detect and are uncoveredsuddenly or unexpectedly. To compounddifficulties, unlike corporate crises thatdo not involve fraud, boards have todecide if they can still trust managementand information provided by them. Ingeneral, there are varying shades of fraud:1. A fraud can have minimal orinsignificant impact. The board maycontinue with business as usual whilereadying damage control measuresin case it hides a more sinister fraud.Nothing is publicly disclosed as theevent has minimal or insignificantimpact and a watchful eye is kept bythe board.2. A fraud can have impact which isin-between that of being significantand insignificant. A board, leaningtowards the view that it can mitigatethe significance of its impact, maydecide not to disclose it or onlydisclose it later or at the next earningsreporting date. A board, leaningtowards the view that the impact ofthe fraud may grow to be significant,may have to assess its disclosure in thelight of the duty to make immediatedisclosure (as in (3) below).3. A fraud could have some significantimpact hurting short-term earningsprospects, but not be expectedto cause permanent damage withlong-term business prospectsintact. The board may keep itstrust in management althoughsome management change orstrengthening is needed. Sucha board would in general makeimmediate disclosure unless theboard has a strong reason to expectthat it would hurt the company moreif it does so and legal advice permitsit to avoid immediate disclosure.Whether a board can justify a lessthan immediate disclosure, howthat would be done and under whatgrounds boils down to a balancebetween the needs of the market andthe interests of the company.4. A fraud can have a highly significantimpact, putting the company’s futurein doubt, and its board may not besure if it can trust management atall or any information providedby them. If the business leanstowards insolvency, the board mayface personal liability should thecompany continue to trade byincurring new liabilities with noreasonable expectation of being ableto repay them. The board also owesan added duty towards creditors.A prudent board is likely to makeimmediate disclosure and appointjudicial managers to salvage thesituation. This can be a situationwhere the interests of the companygoes beyond just shareholders’interest to include a duty tocreditors, thus giving rise to a needfor judicial managers to look after allstakeholders.5. In an extreme case, fraud could beso pervasive and on such a scale as torender the business a sham. The onlystep in such an extreme case, apartfrom immediate public disclosure,is for the board to consider theappointment of a liquidator.Throughout the varying shades of fraud,the more the impact of the fraud is at thetwo extremes of (1) and (5) above, the16

When immediate disclosure is likely to berequired, how immediate is “immediate”disclosure? The level of immediacy is less wheninformation is still “of a suppositional nature orinsufficiently definite”, as mentioned in Rule 703.However, when fraud no longer consists of mereallegations but is clearly established, “immediatedisclosure” by its ordinary meaning, is one that isto be released “without delay”.more the duty of a board is clear. To oneend where the fraud is of insignificantimpact, as with (1) above, a board hasless duty to disclose. At the other endwhere fraud may have extremely orhighly significant impact, as with (4)and (5) above, a board has a clear dutyto make immediate disclosure.It is when the fraud has a degree ofimpact as in (2) above or has onlymoderately significant impact as in (3)above, that a board may need to balancethe needs of the market to know andthe interests of the company whenconsidering its obligations to disclose.The challenge to strike a balanceincreases when the fraud is encounteredsuddenly or unexpectedly.Striking A Balance WhenFraud Is Of Some OrModerately SignificantImpactWhen immediate disclosure is likelyto be required, how immediate is“immediate” disclosure? The level ofimmediacy is less when informationis still “of a suppositional nature orinsufficiently definite”, as mentionedin Rule 703. However, when fraudno longer consists of mere allegationsbut is clearly established, “immediatedisclosure” by its ordinary meaning,is one that is to be released “withoutdelay”. The implication must surely bethat there can be no delay except theminimal amount of time on a best effortsbasis that is needed to prepare and verifya true and balanced announcement,subject to a trading halt or suspension oftrading being called.When would a duty to make a “withoutdelay” immediate disclosure run counterto a concurrent good faith duty to actin the best interests of the company?This conflict comes up when the boardsees a vital need, as a matter of avoidingmore harm, of getting the company intoreasonable preparedness. If getting thecompany prepared takes the same “bestefforts” time as preparing the immediateannouncement, then there is no issue.But what if it takes longer?There are businesses that dependparticularly heavily on managementor its expertise such as those in thecreative, trading or professional servicesindustries or in tightly regulated sectorssuch as banking and finance whereprobity is crucial. Fraud cuts at trustin management, and for any businessthat depends highly on management,the more the need to calm customers,suppliers and lenders when managementfraud strikes. Should the sudden newsof fraud hit business partners withouta board having put in place damagecontrol and recovery plans, the boardmay be burdened with rattled businesspartners deserting, inflicting potentiallyfatal damage. The more likely suchsevere damage, the more a board needsthe company to be prepared withdamage control, business recovery andmanagement replacement plans at orsoon after it makes a public disclosure.Another board may be in a business whichis highly vulnerable after confidentialknow-how or trade secrets are stolen inmanagement fraud, but given some time,a company could use legal measures orother business means to recover stolenassets or obtain an injunction overthe use of the stolen assets. “Rushing”public disclosure may scare culprits andaccomplices to send stolen assets outof jurisdiction to prejudice recoveryefforts, or exposing them to the publicdomain, hurting the company’s businesspermanently. This can put the companyin a far worse situation.In other words, a board can have acommitted, good faith belief that a “lessrushed” immediate disclosure is in thebest interests of the company and thatits belief would be vindicated when theimpact of the fraud is shown eventuallyto be contained by only having animpact on short-term earnings andleaving long-term viability intact.To show good faith, a board mustobjectively believe that, if the companyis unprepared or prejudiced by “rushing”public disclosure, the company is thenhighly likely to be in a materially worseoff condition.While getting ready an immediatedisclosure, a board has to ensure strictconfidentiality and to be on standbyto invoke a trading halt or suspensionin case of a leakage. If indeed there is aleak and the market continues to tradefor a while, the board may face thepossible wrath of regulatory agencies.Even where there is no leak, a regulatoryagency may still take a board to taskif it feels that the board’s actions havebeen less prompt than required and if itdisagrees with the board’s views on whatis in the interests of the company.There are steps a board can take toreduce such regulatory risks. One is thejudicious use of a voluntary trading haltto stop trading in its securities. Anotherstep is for the board to “rush” the pricesensitive aspects of the information into17

FEATURESGenerally, taking perpetrators to task for a crimeis a function to be assumed by the authorities.Meanwhile, the board has a duty to ensure as faras possible that evidence and documents are safe,not liable to be tempered with, and the companyis no longer or at a reduced risk of sufferingongoing harm as a victim of fraud.an immediate disclosure. For instance,a board can quantify the deteriorationin short-term earnings, which is pricesensitive, and set it out in an immediateprofit warning. This is possible onlywhen the board is sure that the impactof the fraud is contained to short-termearnings impact and that the overalllong term prospects are intact. Oncethe profit warning is made known,the market is less in need of other lessmaterial information, which can bedisclosed to whatever extent neededlater. Yet another step is arranging aconsultation with the Stock Exchange,explaining the board’s views on the needfor a balance, which may result in theSingapore Exchange accepting measuresalong the principles of a trading haltwith the release of a form of balancedand fair holding announcement.Care When EncounteringFraudGenerally, taking perpetrators to task fora crime is a function to be assumed bythe authorities. Meanwhile, the boardhas a duty to ensure as far as possiblethat evidence and documents are safe,not liable to be tempered with, and thecompany is no longer or at a reducedrisk of suffering ongoing harm as avictim of fraud. A board facing fraud bymanagement has to be cautious aboutseveral areas. In their haste to look afterthe company, a board must not give uptheir duty (if any under law) to reportan offence to the authorities in exchangefor the culprit returning the spoils ofhis fraud. Such an exchange may beunlawful as some offences, under law,are required to be reported to certainauthorities. A board must be carefulwhen making public disclosure that itdoes not inadvertently expose withoutdue care the identities of third partieswho may be potentially linked withcriminal involvement. This may exposethe company to unnecessary liabilityfor defamation. In summary, a boardshould always seek legal advice.When Immediate DisclosureIs The Only ActionSometimes the interest of the companybecomes secondary. This is when thestock market is awash with rumors orstories about management fraud orif thestock market is confused, with pricesand trading volumes fluctuating. Someinvestors may believe the fraud is minor,while others may take it seriously, andsome may regard the rumors as baseless.Business partners may already be spookedand nervous. In such a situation, wherea false market may exist, a board, evenif the fraud is relatively minor or haveinsignificant impact, is under a duty tomake immediate disclosure.ConclusionAlthough the law in general on disclosurehas not changed, non-executive directorsface serious difficulties when facingmanagement fraud. In other crisesinvolving honest mistakes, the boardand management may still function asa cohesive team, with trust intact, andexecutive directors working with theboard to lead recovery plans.In management fraud, the executivedirectors under suspicion may be eithersuspended or removed, with some stilldefiantly “calling the shots” indirectlyor frustrating investigations. Theremay be either a board vacuum or aboard faced with conflicts. Under suchcircumstances, the market demandsthat non-executive directors be active tolead a recovery. But the non-executivedirectors lack in-depth businessfamiliarity and often find managementor their information unreliable. Yet theirduty to ensure the accuracy of publicstatements is no less than those expectedof executive directors.Caught in between the need of themarket to know and the interest of thecompany, it takes stout-hearted nonexecutivedirectors to stay resolutely oncourse to battle to achieve a justifiedbalance whilst not being in breach anyof their duties. Woe befalls them if theymake any decision they think is balancedbut that is subsequently proved wrong,or make any disclosure that they think isaccurate but that is subsequently provedfalse, especially if they had based theirdecisions or disclosures on unreliableinformation or after they had trustedsomeone they ought not to have trusted.The needs of the market mayunjustifiably overwhelm all regard forthe interests of the company if anxiousnon-executive directors, worried overpersonal risks, err unthinkingly towardsrushing out information by way ofimmediate disclosure with undue andunconsidered haste. If, as a result of thishasty disclosure without the requiredlevel of preparedness on the part of thecompany to keep the business steady, acompany collapses when it could haveotherwise survived, then ultimately itwould be all shareholders who pay theprice for the sake of being told bad newsa little earlier than necessary.The views and opinions expressed in this article are those of the writer and not neccessarily those of SID.18

FEATURESUpcomingPotentialChanges FacingDirectors InSingaporeBy Kala AnandarajahPartnerRajah & Tann LLP AndCouncil MemberSingapore Institute Of DirectorsIntroductionOn 14 June 2011, the Corporate Governance Council Of Singapore (‘CGCS’)released a consultation paper on proposed revisions to the Code of CorporateGovernance (‘Code’). The revisions were prompted by various events aroundthe world, including the 2008 financial crisis, which highlighted the increasingimportance of a good corporate governance regime, and well just as a consequenceof a lapse of time presumably – the last review undertaken was in 2004/5. Theproposed revisions seek to further streamline requirements and practices to ensurea continued high standard of corporate governance among listed companiesin Singapore. The proposed revisions deal, inter alia, with the independenceof directors, the composition of the board, training of directors, multipledirectorships, alternate directors, remuneration practices, risk management, andshareholder rights.Also in June 2011, the SteeringCommittee for the Review of theCompanies Act (‘Steering Committee’)issued its Report on proposed changesto the Companies Act (‘Report’). ThisSteering Committee, along with its fiveworking committees beneath it, had beenformed to look into reform as may benecessary in the areas of directors’ duties,shareholders’ rights and meetings, capitalmaintenance, accounts and audit, andadministration of companies.This article picks up on only certainproposed changes that broadly touchon directors and discusses these in thecontext of various other developmentsbriefly, given space constraints. 1 Forclarity, not all the proposed changes19

FEATURESTraining comes in different shapes and sizes; butthe aim is really to suitably equip the directorwhen he first comes on board and on a continuingbasis with sufficient information, knowledgeand updates about the business, the state of theeconomy and the industry, and the relevant rulesand regulations (whether legal, accounting orsectoral) that apply to the company.touching on directors are discussed,such as that relating to shadow directorsand alternate directors for example,although the latter is definitely a positiverecommendation. The discussionhere, which criss-crosses the SteeringCommittee and the CGCS proposals,represents only one view of the writerfor discussion. There are no right orwrong answers, and for every argumentthere will be a counter-argument.Issues Associated With TheAppointment Of DirectorsAppointment, Removal & ResignationFrom a practical perspective, an issuethat has vexed many companies for along while is how should one appointor remove a director, and how could adirector resign from his directorship.These were matters that had been left tothe articles of association of a companyto address, so that if the matter was notaddressed, doubts and queries couldarise as to whether there has been avalid appointment, or a valid removalor a valid resignation. Interestingly aswell was the fact that the CompaniesAct only expressly addressed the issue ofremoval of directors solely from a publiccompany’s perspective.The Steering Committee Report hasfortunately recommended that thesesimple matters be easily resolved byincluding appropriate provisions in theCompanies Act. One recommendationwill see the right to remove directorsgiven to all companies rather than justto public companies. Additionally, apositive change, if it comes to pass, is thefact that when a director resigns, all hewill need to do is tender his resignationand not wait for the acceptance of hisresignation for it to be valid. Whilstthere may be counter arguments asto whether his notice to the companywas in fact received, that is an issue tobe resolved separately outside of theCompanies Act, as it is a technical one.The ability to resign by giving notice willnevertheless remain subject to the ‘lastman standing’ rule, as that is a criticalelement of the corporate structure.Director QualificationsThe Steering Committee Reporthighlights discussion as to whetherminimum academic or professionalqualifications should be prescribedfor directors. It is positive that theSteering Committee did not decide infavour of prescribing such requirements.Companies are varied, and academicand professional qualifications evenmore differentiated. Importantly, thereis no one academic or professionalqualification that provides the perfectfit to be able to supervise, manage orrun a company. Business acumen andcreativity, which are very critical inestablishing, managing and running abusiness, cannot be taught.However, director qualifications, whenbroadly looked at, are an importantcriteria in determining whether anindividual is a suitable candidate to takeon a directorship role or otherwise. It isalso useful in determining whether theindividual is the right fit for any oneparticular company – not all individualscan perform skilfully in all companies.In this regard, the provisions of theCode have always imposed on thenominating committee the obligationto ensure that the persons they identifyto sit as directors on their board must besuitably qualified.Closely linked to qualifications is theavailability of the individual to devotesufficient time and effort to fulfilling hisobligations if appointed as a director.Much has been discussed about this atvarious forums, and it is comforting tosee that the CGCS has recommendedthat the nominating committeeconsider and decide if a director is ableto adequately perform his duties if thesaid directors serve on multiple Boards.Further, the Board has to decide on themaximum number of directorships thatits directors can hold, and state thisnumber in its annual reports.Director TrainingWhilst qualifications per se are notimportant in this writer’s view, requisitetraining is nevertheless important.Training comes in different shapes andsizes; but the aim is really to suitablyequip the director when he first comeson board and on a continuing basis withsufficient information, knowledge andupdates about the business, the state ofthe economy and the industry, and therelevant rules and regulations (whetherlegal, accounting or sectoral) that applyto the company. To this end, the CGCShas recommended new requirements forcompanies to provide training for newdirectors as well as existing directors,ensuring that such training continuethrough the director’s term. Specificallyon this, the CGCS has further suggestedthat the nominating committeerecommend to the Board specifictraining programs. The provision oftraining aside, the CGCS has proposedthat the specific induction, orientationand other training that has been providedto the directors be disclosed. Whilst therecommendation and constant push fortraining as suggested by the CGCS is20

good, thankfully the Steering Committeeshied away from mandating the training ofdirectors generally. If such a requirementhad been introduced, it would have beena vexed provision difficult to enforce andso toothless, or there would have beentoo many directors simply violating therequirements.Director IndependenceThe discussion on director qualificationsleads on nicely into the independence ofdirectors, as the Code requires a certainpercentage of the board of a listedcompany to be independent. The CGCShas sought to tighten the definition ofindependence by proposing additionsto the current Code further instancesas to when a director is deemed to benon-independent. These include thefollowing circumstances:• where the director is or was, inthe current or any of the pastthree financial years, a substantialshareholder, partner, executiveofficer, or director of organisationsto which the company or any of itsrelated corporations made, or receivedsignificant payments or materialservices in the current or immediatepast financial year;• where the director is a substantialshareholder or immediate familymember of a substantial shareholderof the company;• where the director is or has beendirectly associated with a substantialshareholder of the company in thecurrent or any of the past threefinancial years; or• where the director has served on theBoard for more than nine years fromthe date of his or her first election.On these new proposed inclusions,comments on whether a director who isassociated in any way whatsoever witha substantial shareholder (which refersto a shareholder who owns 5% or moreof the shares of the company) shouldlose his independence are reserved.However, the extended time period thata director spends on a board potentiallymaking him lose independence is agood addition, although some arguethat nine years is an arbitrary numberand that it is fairly easy to circumvent.This is not a novel provision and existsin the UK for example, as well as underthe corporate governance regulations forfinancial institutions in Singapore. Thelength of period is relatively arbitrarilyarrived at, but broadly looks at a directorspending no more than 3 years of 3terms each on a board. The MaldivesCorporate Governance Code, when firstintroduced, had set the term at 6 years.All said, one key aim is really to avoidgroupthink, although of course this isnot the sole purpose for the introductionof this requirement.Comforting is the fact that as under thecurrent Code, the situations where adirector is deemed to be non-independentis not exhaustive. Consequently, acompany whose directors fall within oneof the listed circumstances may, throughits nominating committee, providejustifications as to why the said directorsare independent.Apart from the deeming provisions inthe Code, the proposed revisions furtherprovide that independent directorsshould make up half of the Board where:• the Chairman of the Board and theChief Executive Officer of the Boardis the same person;• the Chairman of the Board and theChief Executive Officer of the Boardare immediate family members;• the Chairman of the Board and theChief Executive Officer of the Boardare both part of the managementteam; or• the Chairman of the Board is not anindependent director.Whilst on the one hand, these changesseemingly brings Singapore in line withinternational standards, taking a stepback, given the traditional corporatestructure and the fact of the prevalenceof concentrated shareholding structuresin Singapore, one wonders whether thetighter definition will do much to changethe manner in which governance prevailsor is managed or is implemented incompanies. One might, however, argue(convincingly or otherwise) that, viewedholistically, this particular tightening ofthe definition of independent directorsworks in tandem with the proposedchange by the Steering Committee toexpressly provide in section 157A thatdirectors can be responsible for just thesupervision of the management of theCompany, in that a more independentboard will be able to better supervise theaffairs of the company (this particularissue is discussed below).Directors’ Duties RelatedIssuesSupervisory Role Of DirectorsA much debated issue has always beenwhat the role of a director is. Is it one ofoversight or is it one of managing or is ita combination of the two. Prior to theintroduction of section 157A into theCompanies Act in or about 2003, andeven after the introduction of section157A into the Companies Act, theposition at law has arguably been that adirector is responsible for managing thecompany as well as its oversight. Thiswas a dual role. Whilst the directorcould not abdicate his duties, he coulddelegate some of these functions tomanagement type persons to perform.Presumably to satisfy a business callto arguably reflect the reality of howdirectors perform their functionsin the boardroom, the proposal toallow for the business of the companyto simply be managed, inter alia,under the supervision of the directorshas been introduced. Whilst thisrecommendation is not unlike that whichexists in many countries where there aredual boards, the structure is different.Hence, a question to ask is whether suchan approach can indeed work within thetraditional corporate structure, and yetallow for the continued growth of goodcorporate governance.21

FEATURESOn the first point, a narrow view of thecorporate structure suggests that boardmembers are voted into boards to bemore than mere supervisors. Whilstno one expects directors to in fact bemanagers on a day-to-day basis, theremust at least be the expectation thata director is doing more than merelysupervising. The fear is that directorstake the fact of supervision only tooliterally, and gradually fail to have fullcomprehension of what the true stateof the company is when they supervise.Additionally, the corporate structure,and the way duties and responsibilitiesare structured contemplate that thedirector is there to protect the investmentof the shareholder and to ensure that thecompany is managed with utmost care.Mere supervision simply cannot entirelyachieve this.The concern is exacerbated becauseofficers of companies do not facestatutory duties and liabilities, whichonly apply to directors. Whilst there isa proposal to extend this, it is limitedto extending it to include just the chiefexecutive officer (‘CEO’), as discussedbelow. Broadly, it may appear that thedirectors are being given a slightly softerrole, whilst the management, who havebeen acknowledged as performing thebulk of the work involving the affairs ofthe company, are not going to have theirduties and responsibilities statutorilyenhance. This then leads to the secondpoint as to whether it could becomecounterproductive. Would shareholdersand investors be left with no trueprotection in the bid to protect somegood men?Extending Of Certain DutiesResponsibilities To OfficersThe Steering Committee has at long lastrecommended that various duties andobligations be extended to the CEO ofa company, who has not been appointedas a director of the company, rather thanbeing simply limited to just directors.The only instance where a provisionhas been widened further than this is inrelation to not making improper use ofinformation, where, for example, agentsare also included.Whilst the extension of duties to act withdue skill and care and the duty to makedisclosures in the event of conflict to theCEO is a welcomed one, this may havebeen too limited. The Report suggeststhat this was a matter of some debate,given the varied feedback receivedduring initial focus consultations.Nevertheless, it is worth highlightingthat the affairs of the company are notjust managed by the CEO, particularlyin the larger companies. There is anarmy of individuals, some of whom areas, if not more, involved than the CEOin managing and running the company.To only extend the duties of duediligence, honesty and disclosure toCEOs will invariably leave a group ofindividuals who typically intimately workwith the CEO on many affairs of thecompany, or who may even be leadingprojects which have been delegatedprimarily to them, with wide rangingauthorities open to potentially continueundertaking activities without the fearof consequence. From a governanceperspective, it is somewhat disappointingthat there are arguments that there wouldbe an increase in cost if these additionalindividuals were also made liable underthe Companies Act, and in fact begs thecounter question of why and what moreis required of them. These are individualswho are clothed with responsibilitiesas they undertake their duties and areexpected to fulfil them to the best of theirabilities. They are expected to alreadybe performing properly and within theboundaries of their duties. They are paidfor these roles that they perform. Further,they are the individuals who couldpotentially be paid large remunerationsif these are tied to the performance ofthe company for example. All relevantcosts would already have been taken intoaccount by the company, whether ofcompliance or otherwise. What addedcost could there be?However, there could be addedadvantages to the corporate governancescene if the duties are extended to theother officers as well. The officers,because they face potential statutoryliabilities, will (as is human nature)be a bit more alert to the task at handand exercise just that bit more caution,thus contributing a little more to bettergovernance.Note that this writer is not advocatingthe acceptance of criminalisation forthe breaches of these individuals Yet,a civil penalty, carefully crafted to bea deterent, is something that could beconsidered. Given the limited space,this is a discussion that will be left foranother occasion.CodificationThere have over time been several callsfor codification of director duties overthe years. As noted by this writer in abook, 2 the:‘debate in favour of codification findsits roots in wanting to provide directorswith greater assistance in understandingthe scope of their duties, responsibilitiesand obligations. However, on thecontrary, an elaborated list of duties,responsibilities and obligations will onlygive rise to more statutory interpretationand likely ambiguity. A detailed listinvariably leads to greater prescription,which may result in possible loopholesbeing identified. A detailed list isalso likely to lend itself to increaseddisputes rather than clarity given theinherent nature of the ambiguityof language. The flexibility that amore generalised statement of duties,responsibilities and obligations providescannot be understated. The move froma prescriptive-based approach to aprincipled-based approach in so far asthe disclosure regime in Singapore andmany other jurisdictions are concernedis testimony to this.The following comments by J F KSantow, 3 Justice of the Supreme Courtof New South Wales, are particularlyinsightful:• Codification of director’s duties,especially of care and diligence, will22

inevitably encounter unanticipatedproblems which increase with degreeof specification.• The advantages of greater precision andaccessibility should not be overstated;inevitably precision must give way tothe need for broad generalities like‘the reasonable person’, if statute isnot to become a straitjacket, incapableof accommodating the enormousvariety of corporate and directorialcircumstances against a backgroundof evolving community expectations.’As such, the non-codification is to bewelcomed.Disclosure Of Company InformationBy Nominee DirectorsThe position of a nominee director,ie one who is appointed to a boardto represent the interest of or to be aconduit of information for another(usually a major shareholder), is onewhich is extremely difficult to execute,and with the introduction of section158 into the Companies Act in 2003/4,it made it even more difficult. Whilstthe proposal of the Steering Committeeto temper the difficulties associated withsection 158 is to be welcomed, arguablyit does not go far enough. Suffice hereto highlight that the moment a mandateneeds to be provided by the board, itis in extremely limited circumstancesthat disclosure can be truly allowedfor. Hence, if the aim is to manageand regulate to a limited extent whatthe nominee director discloses, leavethe burden on him alone to decide, butadd on a duty for him to disclose to theboard what he intends to disclose, whichis already there. Remove everything else,save that the board should have a residualpower to refuse to allow disclosure.This might make the provision moreworkable, and remove any grieve thatboards may be subjected to.Remuneration PracticesAnd DisclosureExcessive remuneration has beencited on different occasions for badgovernance within companies, asindividuals motivated by their potentialgain allegedly ignore the long termvalue growth of the company. Hence,addressing issues associated withremuneration has been a measurereviewed and implemented in variousjurisdictions.To tweak and improve the approach asto how remuneration is set in Singapore,the CGCS has proposed that the leveland structure of remuneration should betied to the long-term interests and riskpolicies of the company. This is to preventunnecessary risk taken by the Board forshort term gains. The proposed revisionshave not lost sight of the importanceto retain and motivate directors andkey management personnel, throughappropriate salaries, and to this end, theproposed revisions suggest that directors’remuneration should be linked tocorporate and individual performance.However, to prevent the directors fromlosing sight of the long term goals, it hasbeen proposed that the company shouldincorporate into contracts provisionsthat allow the company to claw backExcessive remuneration has been cited on differentoccasions for bad governance within companies,as individuals motivated by their potential gainallegedly ignore the long term value growth ofthe company. Hence, addressing issues associatedwith remuneration has been a measure reviewedand implemented in various jurisdictions.incentives in the event of misconduct ormisstatement of financial results. Thisis a common feature in employmentcontracts in many industries already,and it is just a matter of ensuring thatall companies adopt such an approach.A further proposal by the CSGC isto require the company to disclosethe remuneration of all directors, theCEO, and the top five key managementpersonnel of the company, who are notdirectors or the chief executive officer.ConclusionIn the words of Mr Alan Chan, Chairmanof the CGCS, ‘Good corporategovernance plays an important role inensuring the effective functioning ofSingapore capital markets’ and ‘whilstSingapore is well regarded for itscorporate governance standards, theremust be continuous efforts to encouragegood corporate governance practicesamong Singapore listed companies’.This becomes a behavioural issue, andwill require constant preaching to say theleast. It requires committed individualswho are willing and will stand up andsay or do because it is or is not in theinterest of the company. However, evenif there are such individuals around,these are duties which are not easy toexecute all of the time. Hence, anyrule or regulation must be tempered,recognising that there are the individualswho are genuinely trying to perform anhonest day’s task.However, the fact that good governanceis at the end of the day a culturaljourney, is not to say that regulatoryrequirements should not be tweaked ortightened even from time to time. Yet,this writer is an advocate against overregulation. The more prescriptive onegets, the easier it is for non-complianceto result. It is finding a balance, andthe broad view is that the CompaniesAct changes relating to directors are astep in the right direction.23

FEATURESAPPENDIX – Brief List Of Proposed Changes Affecting Directors Recommended For Companies ActRecommendation No.Proposed Change1.1 Removal of definition of ‘shadow director’1.2 Person who controls majority of board is considered director1.8 Removal of maximum age limit for directors1.9 Disqualified directors can apply to court for reinstatement1.10, 1.11 Director’s resignation by written notice – not conditional on company’s acceptance1.13 Private company may remove director by ordinary resolution subject to Articles1.15 No need for shareholder approval for director’s compensation if less than 3 years salary1.17 Loans to directors – liberalisation1.19 Recognition of supervisory role of directors1.20 Statutory recognition of Turquand’s indoor management rule1.21 Shareholder’s mandate to director to issue shares – 2 years1.24 Director’s duties – Improper use of position1.25 Disclosure provisions extended to CEO1.26 Duty of diligence and honesty extended to CEO1.27 Disclosure of company information by nominee directors1.28 Companies can indemnify directors from third party claims5.5 ACRA will keep definitive register of directors, secretaries and auditors – not mandatory forcompanies to keep5.11 Director need not provide residential address5.15 – 5.17 Electronic records; Director to keep updated4.13 – 4.15 Simplified director’s report4.18 – 4.21 Auditor’s reports – streamlining4.22 Threshold for ‘serious offence involving fraud or dishonesty’ raised to $250,0004.23 – 4.29 Auditors and auditor’s liability4.40 – 4.41 Framework for revision of defective accounts1. See the Appendix for a fuller but still not exhaustive list.2. Corporate Governance, Practice Issues December 2009 by Anandarajah, Published by Academy Publishing.3. “Codification of Directors’ Duties” [1999] 73 ALJ 336 at 337.This article in its original form first appeared in the Singapore Law Gazette August 2011 issue. It was reprinted in the SID Directors Conference Booklet 2011. The views and opinionsexpressed in this article are those of the writer and not neccessarily those of SID.24

FEATURESA Primer ForWould-BeDirectorsBy Belinda GibsonDeputy ChairmanAustralian Securities And InvestmentsCommissionIntroductionNon-executive directors have a fundamental role in maintaining the integrity ofour capital markets and ensuring investor confidence. Without that confidence,the whole community suffers. A series of significant cases brought by the AustralianSecurities and Investments Commission, most recently Centro, provide importantguidance on what ASIC expects of listed non-executive company directors. Thereare a number of key principles that ASIC expects non-executive directors willfind of assistance. Directors must understand the company’s business and howit is run. Understanding the business means knowing what is significant to thecompany’s financial and business performance; in other words, the business’sdrivers and how the company monitors and reports them to the directors, andthen to the market.What Directors Needunderlying budgets and forecasts. All ASIC expects a board member toTo Knowdirectors, irrespective of background, have sufficient knowledge of the basicDirectors need to understand theeconomic environment in which thecompany operates, the key risks itfaces and how they are managed, andthe robustness of material assumptionsmust have a minimum financial literacyand competency so as to understandthe financial position of the companyand assess how it is reflected in marketdisclosures.accounting concepts in a financialstatement to enable them to carry outtheir responsibilities monitoring andguiding management. If they do nothave these financial skills, then they25

FEATURESshould get them.Centro’s CaseIn the Centro case, ASIC did not arguethat directors needed to check theaccuracy of figures or the accountingtreatment in the company’s financialstatements. Nor did the Centrojudgment decide that directors musthave knowledge of every accountingpractice and standard. However, somecommon accounting concepts mustbe grappled with. One is solvencyand another is classification of debt ascurrent or otherwise.Directors must consider relevantinformation provided to them. Theymust ensure that they have access toboard papers and that they read themand use the information gained inconsidering all matters put to the board.The Centro decision has highlightedthat directors must review mattersagainst their knowledge of the company,including knowledge obtained fromdifferent or earlier board papers.Directors must be sceptical.ASIC expects board members to askmanagement questions and to challengerecommendations put to them.They must apply their minds to criticallyreview the information given to themagainst their knowledge of the company.If the information is not consistentwith that knowledge, they must probemanagement until they are satisfied. Itis vital that directors do not uncriticallyadopt the work of management andadvisers on issues of fundamentalimportance to the company.No Abdiciation OfResponsibilityDirectors are expected to bring theirexpertise and experience to the board’sdeliberations on all matters. They cannotabdicate responsibility in areas wherethey have less expertise than others onthe board.ASIC accepts that much of a company’sactivities must necessarily be delegatedfrom the board to management andfrom management to employees.Nevertheless, there will be some mattersthat cannot be delegated. One suchmatter is where the director’s opinion isrequired.Where an opinion is required by law, asin approving financial reports, directorsmust apply their own knowledge to theinformation provided and form theirown opinion.This does not exclude relying on othersto inform that opinion, but directorsmust provide the “final filter”.Delegation, where permitted, must alsobe appropriate. ASIC expects the boardDirectors must consider relevant informationprovided to them. They must ensure that they haveaccess to board papers and that they read themand use the information gained in considering allmatters put to the board.Directors are expected to bring their expertiseand experience to the board’s deliberations on allmatters. They cannot abdicate responsibility inareas where they have less expertise than otherson the board.to consider the terms of any delegationor request for advice. The delegate mustbe suitably briefed and given enoughinformation to properly perform theirtask. Directors should only rely onappropriate delegates or advisers. Thisgoes beyond the competency of thatperson, and includes, for example, thatthe delegate has no conflict of interest.After a matter has been delegated,directors must continue to considerif the delegation is appropriate. It isexpected that directors will monitora delegate’s performance, taking intoaccount the matter’s seriousness andthe company’s circumstances. They arealso expected to contemplate any advicefrom an expert in the context of thecompany’s circumstances, their ownknowledge and any qualifications orexclusions in the advice. Directors musttest whether their decision to delegateor rely on advice is justifiable in thesituation.ConflictConflicted directors should assessthe steps they should take to protectthe company from serious harm if atransaction with which they have aconflict then goes ahead. Finally – andobviously – ASIC expects a director toact honestly and not use their positionto advantage themselves.This article was first published in The Australian Financial Review on 27 September 2011. Permission to reprint granted by The Australian Financial Review Magazine.26

FEATURESThe Air OceanCase And ItsImplicationsOn Directors’DutiesBy Christine Chan, Aaron Lee,Christina Ong, Yap Lune Teng AndSophie LimPartners, Allen & Gledhill LLPThe CaseIn Ong Chow Hong (alias Ong Chaw Ping) v Public Prosecutor and another appeal[2011] SGHC 93, Mr. Ong Chow Hong (‘‘Ong’’) appealed to the SingaporeHigh Court (“SGHC”) against a disqualification order barring him from takingpart in the management of any company for one year. He had been chargedand convicted by the Singapore District Court (“SGDC”) for failing to exercisereasonable diligence in the discharge of his director’s duties as a director of AiroceanGroup Limited (‘‘Airocean’’). The prosecution also filed a cross-appeal on thebasis that the length of the disqualification order was manifestly inadequate.The SGHC held that the one-year disqualification order imposed by the SGDCwas manifestly inadequate and enhanced the order to 24 months. The case iscurrently under appeal in the Singapore Court of Appeal.Backgrounddirectors, Thomas Tay (“Tay”) was passport impounded by the CPIB.At the material time, Ong was the nonexecutivechairman and independentdirector of Airocean, a company listedon the Singapore Exchange SecuritiesTrading Limited (“SGX”). On 6September 2005, one of Airocean’squestioned by the Corrupt PracticesInvestigation Bureau (“CPIB”) over36 hours, on corruption allegationsinvolving, inter alia, Airocean. Tay wassubsequently arrested and released onbail on 7 September 2005, with hisThe Airocean directors convened anurgent board meeting the followingday to discuss Tay’s investigation byCPIB, where the directors present wereapprised of what had occurred to Taybut nonetheless resolved that nothing27

FEATURESfurther needed to be done. Followinga Straits Times article on 25 November2005 about Tay being subject to aCPIB probe, SGX contacted Airoceanseeking an explanation on why Tay’sprobe was not made public, and aconfirmation whether Tay was thesubject of CPIB investigations. Airoceanrequested SGX to suspend the tradingof its shares pending an announcement.When updated by Airocean’s companysecretary that same morning on thelatest developments, Ong instructed thathe would agree to any announcementissued by Airocean if another nameddirector approved of it, as he had plansto play golf.The Charge And JudgementOf The District CourtOng was subsequently charged in theSGDC, for contravening section 157(1)of the Companies Act (“CA”) in failingto exercise reasonable diligence indischarging his duties as an Airoceandirector. Upon conviction, he wasfined S$4,000, in default four weeksimprisonment, and disqualified frommanaging the affairs of any companyfor a 12-month period under section154(2) of the CA.The View Of The High CourtThe SGHC concluded thatSingapore’s disqualification regime waspredominantly protective in nature,and the SGDC had erred in law wherethe latter had viewed a disqualificationorder as punitive in nature which failedto consider the wider public interests.With regard to the wider publicinterests and protection afforded bythe disqualification regime, the SGHCelaborated that such protection has twosides to it:• “Thin” or specific protection whichprotects the public from an individualwho has failed to discharge hisobligations qua director; and• “Thick” protection which generallyprotects the public from all errantdirectors by an uncompromisingreaffirmation of the expectedexemplary standards of corporategovernance, particularly for listedcompanies within Singapore’sdisclosure based regime. This formof protection is expressed throughthe appropriate calibration ofdisqualification orders assessed to besufficient to deter serious lapses incorporate behaviour.The gravamen of the charge was thatOng consciously abdicated fromhis responsibilities as director; henever asked to see Airocean’s draftannouncement before it was publiclyreleased, and was quite content todelegate his responsibilities to anotherdirector. The court considered theone-year disqualification manifestlyinadequate and in enhancing thedisqualification order to 24 months, theSGHC highlighted the following pointsin its reasoning.First, it rejected that Ong failed to graspthe reality of the difficult decisionsfaced by Airocean at the time sincethe directors had been apprised of thesituation at the 8 September 2005 boardmeeting. Tay’s questioning by CPIB for36 hours and impounding of his passportindicated the matter was not trivial.The urgency in convening the aforesaidboard meeting reflected the seriousnessof circumstances surrounding Airoceanand if Ong could not perceive itscircumstantial gravity, then he shouldall the more be kept away fromdirectorship positions where perceptivejudgments are fundamental. Second,Ong had the time and opportunity tobe proactively involved in releasingthe announcement. Even if he wasimmediately engaged and/or could notassist in the substantive drafting of theannouncement, he ought to insist onhaving sight of the final draft beforerelease. At the minimum, he could vetand approve the final announcementafter his golf game, especially since theannouncement was extremely short andreleased only at 8:00pm.Lastly, Ong’s contention that herelied on another legally traineddirector’s responsibility to handle theannouncement, which he saw as a legalissue to be handled by lawyers on theboard, was rejected. While the courtaccepted that there are limits to the extentof knowledge and expertise a directormay be expected to have, and that somereliance may be placed on professionaladvice, each listed company directorhas a solemn and nondelegable dutyof due diligence to ensure compliancewith market rules and practice. It isinsufficient and unacceptable for adirector to expect his co-directors to do“right” by the company.ConclusionThis case is significant in statingcategorically that Singapore’sdisqualification regime is protective innature, especially for listed companieswithin Singapore’s disclosure-basedregime. A competent director shouldcomprehend the pressing urgency andsignificance of an SGX query and thecritical need to respond accurately andpromptly. In the discharge of theirduties, reliance on professionals or“specialised” directors, must be balancedagainst the responsibility that the lawplaces upon every individual directorto bring to bear his own judgment inevaluating the advice received and notseek shelter behind other “specialised”directors. Most importantly, the courtdemonstrated that it will disqualifydirectors for substantial time periodsif it is established that there have beenserious lapses in discharging theirresponsibilities. Judicial evaluation offacts will henceforth be made bearing inmind the deterrent aspect and protectionobjective of disqualification orders.This article was earlier printed in the SID DirectorsConference Booklet 2011.28

FEATURESA Rethink OfAccountingStandards;Expanding TheAudit ScopeBy Lim Hock SanPresident & Chief Executive OfficerUnited Industrial Corporation AndCouncil MemberSingapore Institute Of DirectorsIntroductionDuring the last three decades, the business environment has grown even morediverse and fast-paced, than ever before.We have entered a new normal - Aborderless world; extreme volatility;compressed business cycles; ceaselesssearch for arbitrage opportunities;product and brand extensions; backto the future but with emotional linkto the past; fraying and fracturing ofindustry boundaries; and ambivalencetowards both short and long-termssimultaneously. Alliances andpartnerships are forged and terminatedserially. Company operations areimpacted by external market forcesand competitive responses. Countriescompete for private sector investmentflows, with unique industrialpolicies. Meanwhile, the financialindustry relentlessly introducedfinancial innovation, exotic derivativeinstruments, customized productsand risks, and engaged in risk-transferfunctions, for what was previouslythought as risk-free profit.With a dynamic business landscape, theaccounting profession jettison archaicaccounting practices, introduce bestpractices, and fast-track new accountingstandards. Globalization underlinedthe imperative of convergence ininternational financial reportingstandards.All these reforms were intended toraise accounting’s historical recordkeepingrole, and bring it up todate for contemporary relevance, byensuring financial statements proximateeconomic reality as far as possible.The Widening “ExpectationsGap”As stewards for the Company, nonexecutivedirectors (“NEDs”) arecharged with oversight of management,and oversight of business operations.But, even with the best will in theworld, non-executive directors are parttime.As businesses careen throughcomplexity, uncertainty and volatility,NEDs chose issues to focus, but largelydepended on reports to the Boards byits top executives, external auditors’presentations and reports, internal auditreports, and specially commissionedinvestigations, whenever the needarises. This was a case of “oversight byexception, or of selective inattention”,29

FEATURESThere has always been an “expectations gap”between what directors and shareholders thoughtauditors were doing, and what auditors couldrealistically and practically be expected to do. Thisis not surprising. A medical doctor who conductsa health screening check does not guarantee thata patient is in the pink of health. He does notcall for an entire battery of defensive, preemptive,needless, and risky tests, without cause.informed by periodic board strategicrenews.There has always been an “expectationsgap” between what directors andshareholders thought auditors weredoing, and what auditors couldrealistically and practically be expectedto do. This is not surprising. Amedical doctor who conducts a healthscreening check does not guaranteethat a patient is in the pink of health.He does not call for an entire batteryof defensive, preemptive, needless,and risky tests, without cause. Thedoctor’s protocol calibrates graduallyintrusive and aggressive interventions,as each intermediate outcome providesre-assessment and reveal further tests.Even then, health care professionalsare coming to the view that with sometests prone to false positives, more testsand risky invasive interventions, donot necessarily improve the health orsurvival chances of patients, and may infact do more harm than good.What is disconcerting for observers ofrisk-based audit is that the “expectationsgap” has grown in recent years; in partbecause of the complexity describedearlier and in part by the reaction of theauditing profession to litigation fears.The “Genesis” Of TheProblemIn the early days, as accountingtreatment and interpretation werenot explicitly defined and accountingstandards mandatory, auditors could andwere expected to exercise judgment onmatters of substance. Using time testeddoctrines of conservatism and prudence,materiality and intention of financialtransactions, and general notions ofgreater good and simplicity for readersof financial statements; it was a lighttouch“principles-based” approach. Inan uncertain world and, in the words ofCharlie Munger, “we are all ignorant – noone knows enough now to cope with thefuture”. In the 2002 Letter to BerkshireHathaway shareholders, Warren Buffetwrote: “When Charlie [Munger] andI finish the long footnotes detailing thederivatives activities of major banks,the only thing we understand is thatwe don’t understand how much risk theinstitution is running”.When the very attempt to illuminate,obfuscates and create further opaqueness;the aphorism – “to be imprecisely right -than to be - precisely wrong” holds sometruth. This is not wishful thinking forthe halcyon days of old, but to remindourselves of the purpose of accountingand auditing viz., to serve readers andusers of the financial statements in avibrant capital market.In an earlier era, in order to arrive ata true and fair view of the Company,there were expectations for auditors,with their rigorous professional trainingand experience, to maintain healthyskepticism and keep a lookout formalpractices and frauds. It was a formof preemptive contriteness, as auditorsdealt with difficult and messy issuesin a professional manner by exercising“deep” knowledge and judgment.Then, events took a strange turn. Severalhigh-profile large-liability litigation casesattempted to hold auditors responsiblefor sins of omission for failure to ferretfraud. This was despite the inherentconstraints of auditing – statisticalsampling techniques, nature and patternof checks informing audit focus, costcontrol and cost-effective audits, etc.During times of failure, questions wereraised on auditor’s judgment, arbitraryinterpretation of accounting issues, andfor falling short of their duty.Within both the profession and thebusiness community, it was thoughtthat business had changed dramaticallyand accounting issues too important tobe left entirely to auditors. Judgementwas subjective and open to wideinterpretation. Moreover, it was feltthat without predetermined mandatoryaccounting standards, auditors may bevulnerable to persuasion from clientskeen to adopt a “positive” interpretation,or “spin” of events. It then became a caseof “better take the steering wheel awayfrom the auditor, and put the system onauto mode”.So, the world moved from the lighttouch,“principle-based” system towardsthe heavier hand of “prescriptionbasedor rule-book” approach. Asevents unfold, this had far reachingconsequences. Specificity requiresprecise accounting standards onevery aspect of business. Accountingstandards have to be detailed and preciseenough, to cover every conceivable andinconceivable situation. Things havegrown so complex that even accountantshave difficulty keeping up to date withthe intricacies of standards, much lessits meaning. Most people could seehow ludicrous and futile this route is,but other options like turning the clockback, appear even less appealing. Werealized we run the risk of missing thewoods for the trees, but persisted on30

this route, because of the lack of betteralternatives.Litigation fears drove and led to aculture of box-ticking. Whether assetsare pushed of balance sheet, or whetherthe standard interpretation underthe accounting standard serve anypragmatic commercial purpose doesnot really matter. So long as accountingrules allow it, even if it was designed andapplicable only under a range or set ofcircumstance and times, auditors willaccept it, and shareholders are none thewiser.And so, we had Enron. Enron wasan accident, waiting and bound tohappen, in an era of off-balance sheetrisks, related party transactions, andasset-light (meaning little equity, highleverage) alchemy.Instead of “substance” driving“form”, a system designed to preventcapriciousness and variability ofinterpretation, now focus on complianceof “form”, and pay scant regard to thepurpose behind the transaction. Inessence, it became a licence for theprofessionals to look away, if there ismisinformation or misinterpretation,through caveat emptor for users of thefinancial statements. The pendulumswung to the other extreme. Assuccinctly described in the Lex Columnof the Financial Times:“It is far easier for anaccountancy firm to retaina lucrative relationshipwith its clients if it doesnot sit in judgment ontheir activities, but simplyadheres to a set of blindrules. Auditors can moreeasily defend lawsuits whenthings do go wrong if arule book can be appealedto. But this is preciselywhy the whole system isso frustrating from theinvestors’ perspectives.”Post Enron, Lehman Brothers, andBear Sterns, and others imploded asthey Icarus-like sought competitiveadvantage and leverage for profits. So,we bear witness on how both approaches– whether “principles–based” or “rulebookbased” each has their shortcomings, ashumans prevail upon and circumvent asystem, for self-interest, and rationalizetheir behavior.“Tightly Coupled AndNetworked” World(Where everything is tied to everything elseand causal effects are foggy, unpredictable,and may result in chaos).Today’s financial markets operate inan on-line digital world of instantinformation dissemination andregurgitation of analysis reporting.Arbitrage and algorithmic computertrading squeeze out inefficiencies andredundancies. Small changes can havelarge consequences - the so-called“butterfly effect” of “sensitive andoverwhelming dependence on initialconditions”. An error, or revisionin thinking, or even the rounding anumber, can initiate an exponentialchain reaction of Tsunami-likefluctuation, resulting in “systematic”failure.Accounting standards or systems thatare deeply synchronized or enmeshedin complex business environment canbe right most of the time, but run fattails risks of being completely irrelevantat other times. Mark-to-market assumesthat the “efficient market hypothesis”is substantially valid, namely, that allavailable information is incorporated inthe price of an asset of a stock. But pricesand market values are volatile precisely,because of differing beliefs, perceptionsand assumptions by market participants.Replicating so-called economic realityon a moment–to–moment, accountingperiod-by-accounting period is adangerous thing because reality is arapidly moving target. As describedby an observer, in a world of randomevents, “A little disorder may not be abad thing”.Fair value which treats unrealizedgains as objective earnings, far frombeing an unalloyed virtue, introducesneedless risk for commercial entities bycomplacently lulling organizations toleverage more than they should. Thenotion of fair value gains behaviorallyaffect business decisions throughwillingness to assume more risks, takingon or passing investment opportunities,evaluating major acquisitions, and affectdecisions on whether or not to engage inhedging activities.Warren Buffet has warned that “markto-market”accounting easily becomes“mark-to-model” in illiquid markets,and even “mark-to-myth”. In extremis,it is “mark-to-pure-guesstimate” orsimply “mark-to-fear when there is“credit freeze” and gridlock, completeevaporation of liquidity, and contagionand unexpected correlation risksamongst all asset classes.Take liquidity as a case in point. Writingin the Financial Times in October 2007,John Gapper observed “Liquidity isa tricky risk to manage”. There iseither abundance or a complete lack ofliquidity and this fact alone, determineshow much assets are worth.• What is the utility of “cash” at varioustimes?• How do you value a bottle of waterin the midst of an indefinite journeythrough the desert?• What about embedded leverage,which are camouflaged under presentday accounting standard?When companies takes vertical andhorizontal leverages across companies,at three or more tiers, - of associatesor joint ventures or subsidiaries; andwhere accounting rules do not requirecompanies to consolidate all such debts,all these “leverage upon leverage” will31

on the Company’s internal controlsystems, the internal audit team, andcounting on the integrity of its fulltimeexecutives are by themselvesnecessary, but not sufficient. It wouldbe a terrible waste of societal resourcesif independent, well qualified andexperienced auditors should limittheir capabilities and responsibilities,because of self-interest, or litigationfears. Shareholders and investorsneed and can do with a heightenedaudit watchdog role on corporations.In a new expanded role, the auditfee could be split 75% for statutoryaudit and 25% (ranging from 20%to 30% as the case may be) for the“review of internal controls”. Thisreview would cover the internalcontrol systems for financial,operational, and compliance risks.Not to detract from the importantfocus on the statutory audit and toavoid escalating fees, liability forauditors in cases of shortcomings todetect internal control weaknesses,would be limited to ten times the feeallocated for that review. The liabilityin the case of the statutory audit forfinancial review will remain as per thecurrent practice.Auditors could spell out the additionalscope of the internal controls at eachAnnual Report, briefly stating therecords, work, and people they havechecked or met with. To ensureaccountability and present a “face”within the firm, the lead partner ofthe named audit team audit shouldsign the opinion in the annual report,rather than in the name of the auditfirm.The public should not be undulyconcerned on liability limits placedon audit firms, since auditors docare for their professional reputation,integrity, and brand equity. Thehallmarks of a profession are inits standards of ethical conduct,objectivity, independence, and thepride and professional responsibilityfor their work.(iii) Audit As Main Revenue SourceFor Audit FirmsAudit firms should not be distractedfrom what they do best - competingon their quality and impeccableprofessional standards. The mainrevenue source for auditors shouldbe in their audit work, rather thanfrom non-audit services. Otherwise,the firm’s energies and talents will bechanneled to this lucrative work, andaudit work becomes an appendage orloss leader for non-audit services.In the current situation, the onlyremaining reasons preventing therace to the bottom for audit, is themodicum of professional conduct,concerns on personal liability, andthe limited competition among theBig Four.(iv) Sufficient Audit FeesAuditors should be fully andsufficiently compensated for thequality, scope and professionalism oftheir expanded audit role, in order toattract fresh and continuing capabletalent into the audit profession.Specialist expertise should bejustly rewarded for their skills andexperience, and to compensate for theliability risks assumed in exercisingjudgement.(v) Review Of Risk DisclosuresIssuesOther disclosures of interest toshareholders include: (a) theembedded risk of leverage; (b) the“known known” assumptions, andthe “known unknown” risks ofcurrent and prospective businessoperations and activities; and (c)any externalities. Since certainbusiness initiatives carry higher risks,disclosures in the Annual Report willbe meaningful. Auditors can chooseto comment on these disclosures,if they hold contrary news. Thesedisclosures would be covered by the“business judgment” rule, so long asthey are decided in good faith.(vi) Management InformationAt the strategic level - beyond thestatutory and in-depth internalcontrol reviews, users of financialstatements will find it useful for abroad assessment to directors whowill report to shareholders in theannual report, as to whether thecompany has processes in place toensure that financial reporting andmanagement information is relevant,complete, and reliable. This is ahigh-level assessment to address anyabsence of information availability,and not to ensure or underwritethat business decisions are sound,which are entirely the directors’ andmanagement’s responsibilities.(vii) Relationship With ManagementThe foregoing measures may requireauditors to have a robustly adversarialrelationship with Management.Healthy skepticism provides checksand balances, precisely to counterinertia and unquestioned acceptanceof the status-quo. This creativetension, far from being antagonistic,works in the best interest of theCompany.Regulatory MeasuresLike the opening sentence of LeoTolstoy’s classic Anna Karenina: “Happyfamilies are all alike; every unhappyfamily is unhappy in its own way”, theanalogy for companies must be: “Greatcompanies are all alike, every problemcompany is dysfunctional in its ownway.”There are many things that can gowrong in a company. Poor leadership;inept, corrupt management withlittle insight or foresight; or hubris-33

FEATURESdriven CEO betting the company, orengaging in a flurry of activities withlittle progress; timorous or directionlessboard unable to recognize incipientsigns or patterns of the future, andlacking a steady hand, sober judgementand gravitas; persisting with a bankruptor outdated business model; cataclysmicexternal environmental forces beyondthe evolutionary ability of the adaptiveorganization; and so on.What is evident is that diagnosis andunderstanding of the financial status ofcompanies is crucial in prescribing andexecuting proper strategies. For thisreason, the accounting and financingfunction must be brought up to speedin the modern corporation.(i) Accounting StandardsThe audit profession and theregulatory authority must prevailupon the international accountingstandards rule-setting committeeto reaffirm a “prescription-based”system, but with an overlay ofjudgement.Instead of specifying prescriptionmeasures in greater microscopicdetail, there will be situations whereit is best to let accountants andauditors say “it depends” and expectthem to exercise contingency basedjudgement, with accountability.Take fair value gains as a case in point.Prudence suggests that perhaps, onlyone-half of the incremental fairvalue gains should be recognizedin any one accounting year, onthe basis that these are unrealizedearnings. In contrast, full, or twothirds(if perceived as temporary),of the incremental impairmentlosses should be recognized in anyfinancial year. To illustrate, if thefair value (FV) of an asset increasedfrom S$40m to S$100m in Year 1,and subsequently declines to S$60min Year 2, the FV gains in Year 1 areS$30m (instead of S$60m gain), andthe FV losses in Year 2 are S$10m(instead of S$40m loss).This shock-absorbing buffer or builtinstabilizer attenuates the gyratingeffects of market-based asset values.Overall, there will be less volatilityin the Net Asset Value (NAV)per share, and reported earnings.Currently, regardless of its intrinsicenterprise value, the stock price ofa listed company, factors a premiumor discount from its NAV, based onmarket optimism or pessimism ofits going-concern value – that is,reflective of the net present value of itsfuture dividend stream under normaltimes; or the personal utility andliquidity preference of shareholdersunder abnormal circumstances.Common sense and pragmatismshould prevail and be the guidinglight for all the remaining accountingissues.(ii) CFO RelearningThe financial health and wellbeingof the company rests with itsexecutives and directors. Knowledgeand execution becomes crucial.CFOs of companies must maintainup-to-date their “fungible” skills,and be required to do compulsory“continuing professional education”.Continuous learning can and shouldencompass not only changes inaccounting standards and practices;but also the impact of strategy andbusiness models on the company’sfinance and vice versa; how the socialmedia could affect the companyfinancially; causal relationship of thevarious parts on finance; and periodicindustry dialogue with other CFOson industry-specific issues.(iii) Continuing Education ForAuditorsThere should be periodic intensivetraining sessions, with tests, to ensurethat auditors refresh themselves on“back to basics” accounting theoryand logic, learn evolving auditingconcepts for the changing businessrequirements, make choices onpragmatic applications of accountingprinciples, assessing the validity ofcurrent capital market finance theory,and contemporary business issues.(iv) Peer Reviews By SeniorAuditorsIt will no long be possible to useaccounting standards as a clutchfor “blind compliance”, or resort to“slavishly adoption” of the standards,in lieu of common sense.Senior members of the profession,including retired partners of auditfirms should be co-opted withremuneration, and working ina three-person panel to conductperiodic high-level review at the auditfirms. These include the recruitment,quality, training, exposure andexperience of auditors, and auditingmethodology of risk assessmentmodels employed in their work.To command respect and authority,reviewers should have “deep”knowledge.There will be additional costsin raising professional auditingstandards, but those can be bornethrough a (capped) levy on the auditfirms themselves, some of which willbe in substitution for the practicespresently instituted by the firmsthemselves.This article is an expanded remarks made by panellist on: “Do we need auditors?” Singapore Institute of Directors Conference on Corporate Governance, at Shangri-La Hotel, Singapore on14 September 2011. The views and opinions expressed in this article are those of the writer and not neccessarily those of SID.34

FEATURESSID StatementOf GoodPractice No.12/2011Share PledgingBy Directors WhoAre ControllingShareholdersIntroductionThere had been instances in which shareholders who own a controlling portionof the shares of a listed company had entered into personal margin lendingarrangements which involve pledging their shares in the listed company ascollateral for cash.In situations of a stock marketdownturn, the creditors of suchshareholders may demand a margin callor require a mark to market top up ofshares. Where the shareholder is unableto fulfill its obligations as a borrower,his pledged shares may be seized and/or force sold by the creditors. This maylead to circumstances where there is achange of shareholding control in thelisted company where the shareholderis no longer a controlling shareholder. Itmay also cause a cross default trigger ofcovenants contained in credit facilitiesentered into between the listed companyand other third parties. This may resultin “event of default” situations therebytriggering acceleration of repaymentof the listed company’s indebtedness.If not handled properly, the listedcompany may find itself in a cash-flowIn situations of a stock market downturn, thecreditors of such shareholders may demand amargin call or require a mark to market top up ofshares. Where the shareholder is unable to fulfillits obligations as a borrower, his pledged sharesmay be seized and/or force sold by the creditors.This may lead to circumstances where there isa change of shareholding control in the listedcompany where the shareholder is no longer acontrolling shareholder.35

FEATURESWhilst controllingshareholders exercisefull proprietary rightsover the shares ownedby them in a listedcompany, they shouldexercise prudence inthe private dealingswith their shares.This is especially sowhere the controllingshareholders aredirectors of the listedcompany, as they owefiduciary obligationsto it.or liquidity crunch. In view of suchsituations, amendments to the ListingManual have been recently introduced.In essence, the listing rules provide thatif an issuer or any of its subsidiariesenters into a loan agreement orissues debt securities that contain acondition which makes reference to theshareholding interests of any controllingshareholder or restricts change ofcontrol of the issuer, and the breach ofthis condition or restriction will cause adefault in respect of the loan agreementor debt securities, significantly affectingthe operations of the issuer, it mustimmediately announce the details ofsuch conditions or restrictions, and theaggregate level of these facilities that maybe affected by a breach of the obligation.Further, in case of such a loan agreementbeing entered into, the issuer mustalso obtain an undertaking from itscontrolling shareholders to notify theissuer, as soon as it becomes aware,of any share pledging arrangementsrelating to these shares and of any eventwhich may result in a breach of theissuer’s loan covenants, followed by animmediate announcement of the detailsby the issuer.Director’s Prudence IsEssentialWhilst controlling shareholders exercisefull proprietary rights over the sharesowned by them in a listed company,they should exercise prudence in theprivate dealings with their shares. Thisis especially so where the controllingshareholders are directors of thelisted company, as they owe fiduciaryobligations to it. Any margin call orforeclosure on their pledged shares mayhave adverse impact on the financialposition of the listed company andmay affect its liquidity and cash-flowposition.Directors should be mindful of theirregulatory and legislative obligationsand duties. In particular, directors’attention is drawn to the following:a. Compliance with Legislation:Directors should be mindful ofregulations and laws pertainingto insider trading in dealing withtheir shares in the listed company.Directors will have to ascertain theimplications of dealing in theirshares under the provisions of theSecurities and Futures Act (Chapter289) of Singapore and other relevantlegislation.b. Compliance with the Listing Manual:Directors should also be remindedof the above amendments to theListing Manual. Directors who are thecontrolling shareholders of the issuerwill have to ensure the compliance withthe undertaking they had providedand the disclosure and notificationrequirements contemplated by theamended Listing Manual while dealingwith their shares.In the event of any doubt, managementshareholders who are directors shouldseek professional advice in their personalcapacity.This Statement of Good Practice is issued by the Singapore Institute of Directors (the “SID”) purely as a guide for its members and with a view to raising standards of corporate governance. TheSID takes no responsibility for the accuracy or completeness of this Statement and the reader should obtain independent professional advice regarding any specific set of facts or issues. No part ofthis Statement may be reproduced (with or without any alteration or modifications) without the prior written consent of the SID.36

EVENTSSID DirectorsConference2011Following the success of the first Director’s Conference in 2010, SID organisedthe Directors Conference once again on 14 September 2011 at the Shangri-LaHotel Singapore, attended by over 400 participants and guests. Ms Jessica Tan,Chairman for the Finance and Trade & Industry Government ParliamentaryCommittee (“GPC”) and Member of Parliament East Coast GRC, was the guestof-honour.The conference, with the theme “Heat &Hope: The New Realities in CorporateGovernance”, featured more than 20international and local leaders providingattendees with a multi-stakeholderperspective on current hot topicsrelated to directorships and corporategovernance.The Institute was fortunate to havethe presence of two keynote speakers– Mr Magnus Bocker, Chief ExecutiveOfficer of the Singapore Exchange andDr Jamshed Irani, former senior directorof Tata Group. Mr Bocker covered theglobal focus on corporate governanceGuest-of-Honour Ms Jessica Tan37

EVENTSissues and looked at three areas such asrisk management, board compositionand shareholder engagement. Healso highlighted how Singapore hascontinually raised its CG standards andupheld its international standing. DrIrani examined current hot issues andchallenges for companies in emergingeconomies, in particular India andChina, in complying with western-stylegovernance frameworks, and what thefuture portend.The three panel discussion sessionswere made more interesting byallowing participants to vote aftereach panel. Drawing the discussionsof the Conference together was masterof ceremony, Ms Kala Anandarajah,Council member of SID.The results of the voting can be foundon page 42.The panel topics and their panellistswere as follows:Panel 1 – Controversial Issues InDirectorshipModerator:Mr Wong Meng Meng, Senior Counsel,Founder-Consultant, WongPartnership& President, Singapore Law SocietyPanellists:• Ms Chua Sock Koong, Group ChiefExecutive Officer, SingTel• Associate Professor Mak Yuen Teen,Director, NUS Business School• Mr Sanjiv Misra, President, PhoenixAdvisors & Senior Adviser, ApolloManagement• Mr Yeo Wee Kiong, Director, Drew &NapierFrom left: Ms Chua Sock Koong, Associate Professor Mak Yuen Teen, Mr Sanjiv Misra, Mr Yeo Wee Kiong and Mr WongMeng MengPanel 2 – Do We Need Auditors?Moderator:Professor Gillian Yeo Hian Heng,Interim Dean, Nanyang BusinessSchool, Nanyang TechnologicalUniversity.Panellists:• Mr Lim Hock San, President & ChiefExecutive Officer, UIC• Mr Ng Boon Yew, Chairman, RafflesCampus Pte Ltd & Member, SIC• Ms Juthika Ramanathan, ChiefExecutive, Accounting and CorporateRegulatory Authority• Mr Teo Soon Hoe, Senior ExecutiveDirector and Group Finance Director,Keppel Corporation• Mr Philip Yuen, Chief ExecutiveOfficer, Deloitte SingaporeDr Jamshed IraniMr Magnus BockerFrom left: Ms Juthika Ramanathan, Mr Ng Boon Yew, Mr Philip Yuen, Mr Teo Soon Hoe, Mr Lim Hock San and ProfessorGillian Yeo38

Panel 3 - Will The SustainabilityAgenda Be Sustained?Moderator:Dr Tan Chi Chiu, Chairman, LienCenter for Social InnovationPanellists:• Mr Kevin Bennett, Director ofSustainability, DHL• Mr Ynse de Boer, Senior Manager,Accenture Sustainable Services,Singapore• Tuan Haji Mohd Shah Bin Hashim,Executive Director, Nestle (Malaysia)Berhad• Mr Thomas Thomas, ExecutiveDirector, Singapore Compact for CSR• Mr Sunny George Verghese, CEO,Olam InternationalThe day’s programme included a10-minute video presentation bySecretary Barbara Hackman Franklin,Chairman of National Association ofCorporate Directors (NACD). In herspeech, Mrs Franklin spoke about threekey challenges facing boards in the UStoday, namely executive compensation;the value of audit and auditors; andthe Board’s role in overseeing IT risk.She also said that NACD believes thateffective governance can contributesignificantly to a company’s financialand ethical performance.From left: Mr Ynse de Boer, Tuan Haji Mohd Shah Bin Hashim, Mr Kevin Bennett, Mr Sunny Verghese, Mr ThomasThomas and Dr Tan Chi ChiuSID was also pleased to have Ms ElaineYew, Singapore’s Managing Partner ofEgon Zehnder International, share herperspective on what it takes for boardsto move to the next level. During herlunch presentation, she examined thechallenges that limit board and henceorganisational performance, and thebest practices of highly effective boards.SID thanks Ms Jessica Tan, the keynotespeakers and panellists, the corporatesponsors and all the guests andparticipants for their kind contributionsand presence.Mrs Barbara Hackman FranklinSID Chairman Mr John LimMs Elaine Yew39

EVENTSMaster Of Ceremony Ms Kala Anandarajah40

Conference SponsorsPlatinum Sponsors:• Deloitte & Touche• Keppel CorporationGold Sponsors:• Egon Zehnder Internaional• NTUC Fairprice• RSM Ethos• Singapore Airlines• Singapore Press HoldingsSilver Sponsors:• Allen & Gledhill• DBS• Ernst & Young• KPMG• PricewaterhouseCoopers• Rajah & Tann• United Overseas Bank• WongPartnershipSID Conference OrganisingCommitteeChairman:Mr Willie ChengMembers:• Ms Kala Anandarajah• Ms Mita NatarajanEx-officio:Mr John KM Lim, SID ChairmanSID Secretariat:Mr Sovann Giang, Executive DirectorThe Secretariat41

EVENTSParticipants were asked to vote at the end of eachpanel discussion. The voting results are shown below.GENERAL QUESTIONS1 I am________________A 34% FemaleB 58% MaleC 8% None of the above2 I am ________________A 30% DirectorB 23% Corporate ExecutiveC 29% Professional AdvisorD 8% AcademicE 10% OtherPANEL 1 QUESTIONS1 There is a need to define the criteria, role andlimit to number of board seats for IDsA 37% Strongly AgreeB 46% AgreeC 12% DisagreeD 5% Strongly Disagree2 Current liabilities of directors are fair relative totheir roles and responsibilitiesA 7% Strongly AgreeB 50% AgreeC 34% DisagreeD 9% Strongly Disagree3 Current levels of directors’ compensation areadequateA 11% Strongly AgreeB 50% AgreeC 32% DisagreeD 7% Strongly DisagreeTime to votePANEL 2 QUESTIONS1 My external auditor brings sufficient value to myorganisationA 20% Strongly AgreeB 48% AgreeC 23% DisagreeD 10% Strongly Disagree2 The Big 4 is an oligoppology that requires greaterexternal regulations to ensure independent andvalue auditsA 40% Strongly AgreeB 40% AgreeC 18% DisagreeD 2% Strongly Disagree3 Accounting standard and rules are changing toorapidly and not sensiblyA 67% Strongly AgreeB 23% AgreeC 10% DisagreeD 0% Strongly DisagreePANEL 3 QUESTIONS1 It is beneficial for my company to act sustainablyA 49% Strongly AgreeB 44% AgreeC 5% DisagreeD 2% Strongly Disagree2 Regulations are needed to get the majority ofcorporations to act sustainablyA 40% Strongly AgreeB 35% AgreeC 19% DisagreeD 6% Strongly Disagree3 Acting sustainably is more about heart and socialresponsibility rather than profitabilityA 34% Strongly AgreeB 43% AgreeC 17% DisagreeD 6% Strongly DisagreeVoting questions42

EVENTSSID’s ThirteenthAnnual GeneralMeetingThe Institute held its ThirteenthAnnual General Meeting (AGM) on 15November 2011 at Marina MandarinSingapore. The meeting was attendedby 32 members present in person.At the commencement of the meeting,the Chairman, Mr John Lim KokMin, said that as many members hadappointed proxies to represent them intheir absence, he proposed that in orderto give such members an opportunityto vote, all resolutions would be votedupon by poll.During the course of the meeting,the following were re-elected to theGoverning Council: Mr Keith Tay,Mrs Yvonne Goh, Mr Daniel Ee,Mr Yeo Wee Kiong, Mr John LimKok Min, Mr Reggie Thein and MrBoon Yoon Chiang. Also, two out ofthree candidates seeking election tothe Council for the first time wereelected. The two winning candidateswere Mr Kevin Kwok Khien and MrSoh Gim Teik.With the election of the two newmembers, the Governing Council nowhas a total of 18 members.43

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EVENTS1-Day EffectiveBoardProgramme(Mandarin) InGuangzhou,ChinaFollowing the Singapore ListedCompany Director EssentialsProgramme (Mandarin) conducted inXiamen in August 2011, the SingaporeExchange and Singapore Instituteof Directors jointly organised a newone-day “Effective Board Programme(Mandarin)” in Guangzhou on 18November 2011.This one-day Effective Board Programme(Mandarin) consisted of 5 modules andwas designed for the China-based boarddirectors and senior management ofour listed companies to enhance theirindividual and collective effectiveness asa board within the framework of goodcorporate governance.The latest Singapore Exchange (“SGX”)Listing Rules announced on 14September 2011 was also discussed.The speakers were Soo Hsin Yu fromProvenance Capital, Grace Wu fromAon Hewitt, Vivien Yui and GerryGan from WongPartnership LLP,and Lloyd Loh from the SGX BeijingRepresentative Office.45

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AdvertorialPersonal D&OInsuranceAllianz Insurance Company of Singapore Pte Ltd and Aon Singapore PteLtd in collaboration with the Singapore Institute of Directors (SID) haverecently launched a Personal D&O Insurance program exclusive to SIDmembers, protecting them against liability arising from their responsibilitiesas a director, of up to $1 million. The first group of policies has alreadybeen issued on the 15th October 2011.Personal D&O Insurance provides similar protection as traditional D&OInsurance policies, but is taken out in the name of an individual directoror officer rather than as an entire board of directors. Cover can be providedfor up to three separate directorships.Why Is It Necessary?Personal D&O Insurance provides directors and officers with an individual, portable policy for their exclusive benefit.Such cover is relevant to all directors, and is of particular importance to the following:• Directors of companies that do not purchase D&O Insurance.• Directors of companies that purchase inadequate insurance, whether in terms of breadth of cover or policy limit.• Independent directors.• Directors who are resigning or retiring from their positions, and who seek run-off protection.• Professionals who assume positions on client company boards.“Independent directors are uniquely exposed to liability arising from the companies whose boards they sit, while lackingthe ability to directly assure that the company purchases relevant insurance coverage to respond to these exposures,”said Mr James Amberson, Regional Manager of Financial Lines for Allianz Insurance Company of Singapore. Headded that the insurance program developed in collaboration with Aon and SID is a proactive response to this issueand provides directors with the opportunity to mitigate this risk for themselves.We are delighted to partner with Allianz and the SID in providing this innovative protection to directors in Singapore.Personal D&O Insurance provides the opportunity for directors to control the breadth and level of protection availableto them,” said Mr Michael Griffiths, Director of Professional Services at Aon Singapore.Exclusive to SID MembersPersonal D&O Insurance cover is available exclusively to SID members.A $1 million Personal D&O Insurance policy covering up to three separate directorships will cost S$1,000 plus GST.For further details please refer to the SID Website,or call Gladys Ng at Aon Singapore on 6239 8880 or email gladys.ng@aon.com.47

Upcoming Talks/CoursesUpcoming EventsFEBRUARY 2012Thursday, 9 FebruaryThursday, 16 FebruaryEnterprise Tax Risk Management And The BoardBy Drew & NapierLessons Learned With CEO And C-Suite SuccessionBy Russell Reynolds AssociatesMARCH 2012Wednesday, 7 March LCD Director Programme Module 1Listed Company Director Essentials: Understanding The Regulatory Environment InSingapore: What Every Director Ought To KnowWednesday, 21 March LCD Director Programme Module 2Audit Committee EssentialsWednesday, 28 March LCD Director Programme Module 3Risk Management EssentialsAPRIL 2012Wednesday, 4 April LCD Director Programme Module 4Nominating Committee EssentialsWednesday, 11 April LCD Director Programme Module 5Remuneration Committee EssentialsTuesday, 17 April Effective Board Leadership Programme Module 1Effective BoardSID-SMU Executive Certificate in DirectorshipModules Programme Dates Assessment DateModule 1: The Role Of Directors: Duties, Responsibilities & LegalObligations10 to 12 April 2012 Take-home assessmentModule 3: Finance For Directors 21 to 23 March 2012 Take-home assessment48

Welcome AboardOctober 2011AzimuddinBehChewChiaGohLamLeeMuhammadPur-Lin ElaineYow FooJin Chong DanielCher Shuie NicholasHock ChoonChee WhyeLiemLimLimLowNgSallehScarpinoKwan Hiong GeoffreySay YanCheng HwaHon-YuSeng Mui DaveSuhaimiMartinTanTanTanTheodorusWongYewChin HweeHee HuanHeok TingDe RondCien Theng AndrewBoon CheatNovember 2011ChiaCurnowDe PetriniGohHoKirtonOi PengDenisePascal YvesBun HiongDannyChristopherNew Council MembersMr Kevin KwokLeeLimLockLongLyeMullerMr Kwok is a senior partner of Ernst & YoungLLP and until recently, the Head of the firm’sAssurance & Advisory Business Services forSingapore and ASEAN. He has extensiveexperience in the assurance industry andhas worked with many of Singapore’s largestcompanies over the last 30 years.He has also served ICPAS in variouscommittees, including the Accounting Standards, Financial StatementsReview, the Disciplinary and the Accreditations committees. He is alsoactive in the Singapore Corporate Awards programme. He was also amember of the Audit Committee Guidance Committee.Mr Kwok, who is a Fellow of the SID is currently active in working withvarious boards and audit committees of listed companies and withthe SID towards fostering improvements in corporate governanceprocesses and practices. He serves on the Advocacy & Regulations,the Memberships and the Board & Director Services committees ofthe SID.Mr Kwok graduated from the University of Sheffield (United Kingdom)with a Bachelor of Arts degree (Second Class Upper Honours, withDual Honours in Economics and Accounting & Financial Management).He joined Ernst & Young in London as an articled clerk in 1977 andbecame a partner of the firm in Singapore 1989. He is a Fellow ofthe Institute of Certified Public Accountants of Singapore (“ICPAS”).He is also qualified as a Chartered Accountant and is a member ofthe Institute of Chartered Accountants in England & Wales, and theMalaysian Institute of Accountants and a Fellow of the MalaysianInstitute of Taxation.Dah KhangBenedict AndrewDennis AnthonyJek AunKok Fong AlfredRudolph AndrewNatarajanPandeSeifertSugdenTanWanMr Soh Gim TeikMr Soh advises corporations through his firm,Finix Corporate Advisory LLP and has morethan 33 years of experience in corporateadvisory, finance, accounting and generalmanagement work. He has previously servedas an executive director and Finance Director/Chief Financial Officer of Sincere WatchLimited, a company listed on the SGX, for 15years until 2008. Prior to that, he had worked in the public accountingsector and was the founding partner of Soh, Wong & Partners, thepredecessor firm of LTC LLP.Mr Soh is a member of the Institute of Certified Public Accountantsof Singapore (“ICPAS”) and a Fellow of the Singapore Institute ofDirectors. He is the immediate past Chairman of the CFO Committeeof ICPAS, and was a committee member of the ProfessionalAccountants in Business Committee of the International Federationof Accountants (“IFAC”) till 2010. He was named the Best CFO ofthe Year at the inaugural Singapore Corporate Awards in 2006 in the‘Main Board Listed Companies by Market Capitalization of belowS$500 million’ category.Currently serving as an independent director on the boards ofseveral SGX listed companies, he has also been a director of a HongKong listed company as well as various other private companies inSingapore, Malaysia, Thailand, Taiwan, PRC and India. Additionally,he is also a director and finance committee chairperson in a numberof charitable and non-profit organizations and regularly participates aspanellist and speaker for various organizations.Mr Soh holds a Bachelor of Accountancy degree from the Universityof Singapore.Call for articles, thoughts, snippets, etc.SharmitaGirijaGoranPeter GrahamHai York VincentChoon Kheong RaymondThe institute would like to hear from you. Send us aricles, thoughts or even short snippets of issues that you are keen on, thatyou want to share about, or that keeps you awake at night. It only needs to relate to directors and/or corporate governance. Forarticles, keep it to 1200 to 1500 words at most. Send your materials by email to the Institute at secretariat@sid.org.sg49