Disclosure of Non-Executive Director and CEO Remuneration in ...

Disclosure of Non-ExecutiveDirector and CEORemuneration in SingaporeMak Yuen TeenK. K. Lalanika Vasanthi1Mak Yuen Teen is co-director of the CorporateGovernance and Financial Reporting Centre(CGFRC) at the National University ofSingapore and regional research director(Asia-Pacific) at Watson Wyatt Worldwide. K.K.Lalanika Vasanthi is manager of the CGFRC.10The Singapore Code of Corporate Governance(Code) was updated in 2005and became effective on 1 January2007. With respect to remunerationmatters, the Code recommends thatthere should be a Remuneration Committee(RC) comprising entirely ofnon-executive directors, the majorityof whom, including the Chairman,should be independent. Each companyshould provide clear disclosure of itsremuneration policy, level and mix ofremuneration, and the procedure forsetting remuneration. The Code goeson to say that the board should includewithin, or annexed to its financialstatements, a report on the remunerationof directors and at least the topfive key non-director executives. As aminimum, the report should disclosethe names of the relevant individualswhose remuneration falls within bandsof $250,000. This is an improvement tothe SGX Listing Manual Chapter 12 thatonly requires disclosure of the numberof directors whose remuneration fallswithin the following bands: $500,000and above, $250,000 to $499,999 andbelow $250,000.Notably, the Code does not specifyan upper limit to the bands. Thisimplies, for example, that if thehighest remunerated director received$825,000, then the upper band tobe disclosed would be $750,000 to$999,999. The Code further states thatwithin each band, there needs to bea breakdown (in percentage terms) ofeach director’s remuneration earnedthrough base or fixed salary, variableor performance-related income orbonuses, benefits-in-kind, and longtermincentives. The Code furtherrecommends that, as best practice,companies should fully disclose theremuneration of each individualdirector.In this article, we report the resultsof a survey of disclosures relatedto remuneration matters. Data onremuneration disclosure practiceswere collected from the latestavailable annual reports of 684companies listed in Singapore fromMay to July 2007. The sample included521 Mainboard companies and 163Sesdaq (now Catalist) companies but

excluded trusts, funds and REITS.These companies had board sizesranging from 3 to 16 directors, with anaverage size of 7.1. Composition of RemunerationCommittee95% of companies disclosed that theyhave a RC and the same percentagedisclosed the full name list of theRC members. 56% have a majority ofindependent directors on the RC while34% have all independent directors.89% said that the RC is chaired by anindependent non-executive director.86% of the companies disclosedthe attendance of RC members atcommittee meetings.2. Non-Executive DirectorRemunerationGuideline 8.2 of the Code recommendsthat “the remuneration of non-executivedirectors should be appropriate tothe level of contribution, taking intoaccount factors such as effort andtime spent, and responsibilities ofthe directors”. The survey found that11% of companies said that their NEDswere paid additional fees for beingcommittee chairs and 22% said thattheir NEDs were paid additional fees forbeing committee members. 10% paidattendance fees to NEDs for attendingboard, committee or annual generalmeetings and 2% paid additional feesto NEDs for other reasons.2.1 Disclosure of remunerationamounts for NEDs45 companies, comprising 42 Mainboardand 3 Sesdaq companies, disclosedexact remuneration for each NED byname. One of the Mainboard companiesdisclosed the exact remuneration of itsdirectors by name but did not disclosewhich ones were non-executive.Therefore, only 7% of companiesfollowed the Code’s encouragementfor companies, as best practice, tofully disclose exact remuneration ofeach director. The table below showsthe distribution of the companies bytheir market capitalisation.542 companies comprising 395Mainboard and 147 Sesdaq companiesdisclosed NED remuneration in bands.For both Mainboard and SesdaqTable 1: Number of CompaniesDisclosing Exact NED Remunerationby Market CapitalisationMarketCapitalisation(SGD)Number ofcompanies> 1 billion > 500 million 3< 500 million 19SesdaqTotal6companies that had disclosed NEDremuneration in bands, the mostcommonly used band is “0 – 250,000”(Singapore dollars). However, therewere 18 other bands found for theMainboard companies, and six otherbands found for the Sesdaq companies,such as “0-100,000” and “0-150,000”.Notably, all the Mainboard andSesdaq companies had disclosed NEDremuneration using a band with aceiling, with “

• base salary (including CPFcontributions);• short-term incentives (STIs) typicallyin the form of bonuses;• long-term incentives (LTIs) typicallyin the form of share options; and/or• benefits.Given the focus of corporategovernance on the creation of longtermshareholder value, long-termincentives have grown in importanceinternationally as a component of theremuneration of CEOs and other seniorexecutives. Similarly, we expect longtermincentives for CEOs and seniorexecutives to become more importantin Singapore.3.1 Disclosure of remunerationamounts for CEOsCompared to disclosure of exactremuneration of NEDs, an even smallernumber of companies (approximately5%) made exact disclosure of CEOremuneration. The majority ofcompanies disclosed in bands, with‘competitive reasons’ being themost commonly cited reason for notdisclosing exact CEO remuneration.There were 36 companies (includingfour Sesdaq companies) that madeexact CEO remuneration disclosure.The market capitalisation of thecompanies are shown in the tablebelow.in Singapore by SingTel, is for theboard to adopt a policy encouraging itsNEDs to own shares in the company upto, say, the equivalent of one year ofNED fees and to hold those shares untilthey leave the board. This is to betteralign the directors’ interests with theinterests of long-term shareholders.3. CEO RemunerationPrinciple 8 states that the “a significantproportion of executive directors’remuneration should be structured soas to link rewards to corporate and12individual performance”. Guideline 8.1recommends that “the performancerelatedelements of remunerationshould be designed to align interestsof executive directors with thoseof shareholders and link rewards tocorporate and individual performance”and that “there should be appropriateand meaningful measures for thepurpose of assessing executivedirectors’ performance”.The remuneration mix for CEOstypically consists of the followingcomponents:Table 2: Number of CompaniesDisclosing Exact CEO Remunerationby Market CapitalisationMarket Number ofCapitalisation companies(SGD)> 1 billion 6> 500 million 2< 500 million 14SesdaqTotal6

536 companies (comprising of 390Mainboard and 146 Sesdaq companies)disclosed the remuneration of their CEOsin bands. Similar to NED remuneration,the most commonly used band by bothMainboard and Sesdaq companies was“0 – S$250,000”. The second mostcommonly used band by companies was“S$250,000 – S$500,000”. There were42 other bands found for Mainboardcompanies and 11 other bands foundfor Sesdaq companies.Of the companies which disclosedCEO remuneration in bands, 19% ofthe Mainboard companies and 12%of the Sesdaq companies did notspecify an upper limit, with the mostcommonly used uncapped amountbeing “>$500,000”.3.2 CEO remuneration mixOf the 36 companies which disclosedexact CEO remuneration, 28 paid theirCEOs bonuses ranging from $6,000 tojust over $4 million. The percentage ofthe CEO’s bonus relative to the basesalary for these CEOs ranged from 7%to 1857%, with a median of 74 %.Nine companies separately disclosedthe amount paid to pension schemesor CPF for their CEOs, while mostcompanies disclosed that the salaryand bonus amounts included CPFcontributions and other allowances.Thirteen companies disclosed benefitsfor their CEOs ranging from $3,800 tonearly $360,000. Benefits disclosedinclude: medical and dental benefits,car allowance, club memberships,group insurance, housing allowance,other allowances and benefits-in-kind.Twenty-three companies granted shareoptions to their CEOs, ranging from 100,000to 1 million options. The vesting schedulesranged from three to ten years.4. Disclosure of remunerationamounts of top executivesOnly 1% of the companies (comprisingentirely of Mainboard companies)disclosed the exact remuneration oftheir senior management, excludingthe executive directors. 80% of thecompanies, comprising of 399 Mainboardand 145 Sesdaq companies disclosed theremuneration of their key executivesin bands. The main reason given fordisclosing in bands or non-disclosure wasdue to competitive reasons.Most of the companies disclosed theremuneration in bands of $250,000(e.g. S$250,000 – S$500,000; S$500,000– S$750,000), with “S$150,000” to“>S$1,750,000”.5. ConclusionIn this article, we reported on theresults of survey of disclosures relatedto remuneration matters in annualreports of SGX-listed companies.Only about 7% disclosed the exactremuneration of each individual NED,5% disclosed exact CEO remuneration,and 1% disclosed exact remunerationof their senior management other thanthe executive directors.Although disclosure of remunerationof directors and senior executivesgenerally remains poor in Asia, HongKong now requires the disclosure ofexact remuneration of each individualdirector in its listing rules. This hasbrought Hong Kong closer to thestandards of developed markets suchas U.S., U.K. and Australia. Beyondthe poor disclosures of remunerationamounts and mix, Singaporecompanies also typically do notdisclose performance metrics for theexecutive directors. While principle9 of the Code recommends thatcompanies “should provide disclosurein relation to its remuneration policiesto enable investors to understandthe link between remuneration paidto directors and key executives, andperformance”, most companies do notcurrently do so.Given the number of companieswhich are controlled by families ormanagement, and the ability of familyand management shareholders tocontrol the appointment of independentdirectors, including those serving onremuneration committees, the poordisclosures of remuneration amounts,mix and policies create a real risk thatdirectors and key executives are ableto extract excessive remunerationwhich hurt minority shareholders.We believe the Singapore shouldconsider moving our disclosurestandards relating to remunerationmatters closer to practices in the moredeveloped markets. The developedmarkets operating on a disclosurebasedregime considers high standardsof remuneration disclosures as one ofthe key elements of such a regime,and not something which should beleft to the discretion of companies orto market forces. n13