More pressure on firms to renew boards, report climate measures in 2024

    A report released in November found that only 12 per cent of the 535 listed firms studied produced reasonably detailed climate transition plans.

    By SUE-ANN TAN

    The Straits Times, 13 December 2023

     

    SINGAPORE - More diverse, refreshed boards and more widespread climate disclosures – these are what corporate Singapore is gearing itself for with new measures to promote board governance set to kick in when 2024 rolls around.

    Chief among these is a rule that a director can no longer be considered independent if the person has occupied a board seat in the same company for more than nine years. This was introduced in tandem with a requirement that companies will have to disclose the remuneration of their chief executive officer and directors for annual reports for the financial year ending on or after Dec 31, 2024.

    With the push for better sustainability reporting, listed firms in the materials and buildings, and transportation industries will be required to provide climate-related disclosures from 2024, according to the recommendations laid out by the Task Force on Climate-related Financial Disclosures.

    This is already mandatory for listed companies in the financial; agriculture, food and forest products; and energy sectors.

    The Singapore Exchange Regulation (SGX RegCo) also released new guidelines for independent financial advisers on what counts as a fair and reasonable offer, after some privatisation offers were criticised as unfair to minority shareholders.

    “Going into 2024, we expect a refocus of governance on the more fundamental aspects of companies such as corporate culture and strategic integration through processes like climate risk scenario planning,” said Professor Lawrence Loh, director of the Centre for Governance and Sustainability at NUS Business School.

    He added that while companies have made great strides in general sustainability reporting, climate reporting requires further attention.

    Transition planning also remains in its very early stages, and companies have to address their climate-related risks and make preparations to lower carbon emissions, he said.

    A report released in November found that only 12 per cent of the 535 listed firms studied produced reasonably detailed climate transition plans, with those in the real estate sector leading the way.

    The SGX RegCo’s mandate on sustainability reporting is welcome, especially as many funds and investors are now looking out for companies’ environmental, social and governance (ESG) reports, said Assistant Professor Aurobindo Ghosh from Singapore Management University’s Lee Kong Chian School of Business.

    He added that having more quantitative metrics will be helpful in evaluating companies’ improvement over time, and across countries aiming to achieve sustainable development goals.

    But even beyond 2024, Singapore regulators have proposed mandatory climate reporting for large non-listed firms, which Prof Ghosh said is a step in the right direction.
    A committee formed by the SGX RegCo and Accounting and Corporate Regulatory Authority recommended that non-listed companies with an annual revenue of at least $1 billion should start mandatory climate-related disclosures from the financial year 2027.

    Associate Professor Victor Yeo from Nanyang Business School hopes that boards do not treat such reporting as a “box-ticking” exercise.

    “The key challenge is the need for a cultural and mindset shift such that there is a genuine belief in the need to incorporate sustainability into corporate strategy for the long-term success of the company,” he said.

    He added that firms have to ensure that they have people with the right experience, expertise and mindset at both board and management levels.

    “The move to make sustainability training compulsory for all directors was a step in the right direction to get the ball rolling. However, this is a constantly evolving space and ensuring that the board keeps up to date is something that we will need to keep an eye out for.”

    Besides sustainability, the new measures on independent directorship have also drawn attention to corporate governance, shining a light on the importance of board renewal and diversity.

    “The idea is to promote a culture and practice of progressive renewal to ensure that the board continues to have an appropriate mix of skill sets as well as diversity of tenure,” Prof Yeo said.

    This will help company boards to have people who can inject fresh perspectives, together with those who have institutional memory, which will allow for better decision-making.

    “What is key is to have boards with diverse skill sets and perspectives that can meet the needs of the company concerned and not have diversity for diversity’s sake.”

    A 2023 study by the Singapore Institute of Directors found that almost one-quarter of independent directors in mature firms – those listed for more than nine years – had served on their respective boards for over nine years, Prof Yeo added.

    Russell Reynolds Associates consultant Alvin Chiang said it is not about completely overhauling boards but about avoiding groupthink.

    “Some main challenges revolve around confidence and trust in the fact that there is value in bringing in less experienced directors. One often thinks that the safest bet is always to go for the tried and tested.

    “That’s all well and good, but why not mix it up a little since the board is able to tap the collective wisdom, knowledge and experience of all its directors?”

    He said that the general consensus is that one’s independence tends to erode over time because of familiarity.

    “In my view, nine years is easy as most director terms are for three years, which means that one can be renewed three times. The first term is essentially to learn the ropes, the second term is to do the work, while the last term is to guide and support succession.”

    Prof Ghosh observed that with this new requirement, companies will need to increase their pipeline with more diverse C-suite members who can potentially be independent directors.

    On gender diversity, Singapore is still quite far from what most consider to be a good proportion, Mr Chiang said, adding that smaller-cap companies in particular have a long way to go.

    Women’s participation on the boards of the top 100 listed companies in Singapore stood at 22.7 per cent as at June 2023, according to data from the Council for Board Diversity. But 13 of the 100 primary-listed firms continue to have all-male boards.

    Beyond gender, boards can also consider more diverse candidates in other aspects, Mr Chiang said, pointing out that many smaller boards tend to comprise professionals who fit into archetypes such as lawyers, bankers and accountants.

    “There is merit in considering other perspectives which may be needed in a company’s business strategy to ensure its longevity and future success.”

    Prof Yeo said other new governance rules also mean companies will have to disclose their directors’ and CEOs’ salaries, a move that promotes transparency and accountability, but that is not without its issues.

    “On the one hand, it is important that shareholders know how much those running the company are being paid and how these sums are derived...

    “There is, however, some concern that full disclosure of precise remuneration may result in a gradual escalation of remuneration as directors start comparing their remuneration with what their counterparts are being paid and all wish to be paid at least the ‘average’ sum.”

    Prof Loh also said that it remains to be seen how ongoing worries such as talent poaching might actually play out.

    “It can well be that the exact remuneration system may turn out to be an accepted corporate fixture in the future.”--