Good corporate governance is essential for the long-term and sustainable growth of a company. High standards of governance entail that companies put in place robust and appropriate structures, processes and people that consider the diverse interests of shareholders, customers, suppliers, regulators and other stakeholders. This is particularly important during the turbulent times of COVID-19, where directors and the executive management team work together to respond quickly to rapidly changing environments.
The Board is collectively responsible for the company’s corporate governance and works with Management for the long-term success of the company. Directors are fiduciaries under law with an obligation to discharge their duties honestly and in good faith, as well as to act in the best interest of the company and its shareholders. This is spelt out under the Companies Act 1967. Directors of SGX-listed companies should also note the interaction of their statutory duties with their obligations under the Listing Rules. This column aims to elaborate on the latter as a reminder to directors.
Duty to act in good faith and in the best interests of the company
One of the key principles underpinning the Listing Rules is set out in Rule 103(5) of the SGX Mainboard Rules and Rule 103(6) of the SGX Catalist Rules, which states that directors of an issuer shall act in the interests of shareholders as a whole. In addition, under the Securities and Futures Act 2001 and the Business Trust Act 2004, the manager of an authorised real estate investment trust (a “REIT Manager”) and the trustee-manager of a registered business trust (a Trustee Manager) has a duty to act in the interests of all the participants of the authorised real estate investment trust as a whole and all the unitholders of the registered business trust as a whole respectively. Directors of a REIT Manager or a Trustee Manager must also take reasonable steps to ensure that such a duty is discharged and must give priority to these interests over the interests of the REIT Manager and its shareholders or, as the case may be, the Trustee Manager, in the case of any conflict of interests.
This principle is aligned to the overarching fiduciary duty of directors to act in good faith and in the best interests of the company. Rule 210(5) of the SGX Mainboard Rules and Rule 406(3) of the SGX Catalist Rules, implemented as a continuing obligation under Rule 720(1) of the Listing Rules, also requires directors and management to have the necessary character and integrity.
Directors are often called upon to exercise commercial judgements that must be made in good faith and on a rational basis. A director must apply his or her mind to the matter before him or her, and consider what is in the best interest of the company.
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SGX RegCo appreciates the challenges of running a business while also needing to ensure that corporate governance standards, laws, rules and regulations are adhered to. SGX RegCo does not seek to exercise judgement on the commercial merits of transactions undertaken by companies. However, we will consider stakeholders’ concerns and, where appropriate, query companies to provide more transparency in their business decisions so that shareholders can make an informed investment or voting decision on the company. For commercial transactions including major acquisitions, interested person transactions, disposals, mergers and delistings, the Listing Rules provide safeguards such as the requirement for a financial adviser (who must be independent in some situations) to ensure that the terms of the transaction are on normal commercial terms and not prejudicial to the interest of shareholders.
Disclosure is a key tenet in the disclosure-based regime so that investors can exercise their voting decisions based on disclosures made by the company including compliance with the Listing Rules. We will elaborate further on the expectations of SGX RegCo in respect of disclosure in the section on the duty to exercise due care, skill and diligence. Apart from exercising judgement on the commercial merits of corporate transactions, SGX RegCo would also highlight that an important facet of this duty is to ensure the sustainability of the company’s business and operations. Environmental, social and governance factors may affect the business of the company and directors need to take these factors into consideration in steering the company forward.
Duty to avoid conflicts of interest
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One of the important facets of the duty to act in good faith is the director’s duty of loyalty. A director owes a duty of undivided loyalty to the company and should not place himself or herself in a position where the duty to advance the company’s interests may conflict with personal interests or other extraneous interests. This duty can be further elaborated below:
Double employment: A director who acts for or is involved in two companies (including related companies) with potentially conflicting interests without informed consent may be in breach of the obligation of undivided loyalty.
No inhibition: A director should not be inhibited by the existence of other employments or interests from acting faithfully and effectively
Actual conflict: A director must take care not to find himself or herself in a position where there is an actual conflict of duty so that he or she cannot fulfill the obligations to one principal without failing in the obligations to the other.
No profit: A director is not allowed to retain any profit which he or she has made through the use of the position as director without the fully informed consent of the company.
No self-dealing: A director is prohibited from entering into, on behalf of the company, an arrangement or transaction with himself or herself or with a company in which he or she is interested without the fully informed consent of the company.
The duty to address conflicts of interest is encapsulated in Chapter 9 of the Listing Rules, which prescribes certain rules for entry into interested persons transactions. The Practice Guidance to the Code of Corporate Governance further states that the Board should have clear policies and procedures for dealing with conflicts of interest. Where a director has a direct or indirect interest in a transaction; or faces a conflict of interest, he or she should make appropriate disclosures and recuse himself or herself from meetings, and abstain from deliberations and voting on the transaction.
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Duty to exercise due care, skill and diligence
The duty of due care, skill and diligence is founded on each director’s obligation to ensure compliance with the Listing Rules. Rule 210(5)(a) of the SGX Mainboard Rules and Rule 406(3)(a) of the SGX Catalist Rules require directors to have the appropriate experience and expertise to manage the company’s business. They must exercise due care, skill and diligence in doing so.
A director whose act or omission causes the company to breach the Listing Rules is also deemed to have contravened the Listing Rules, as set out in Rule 1402 of the SGX Mainboard Rules and Rule 302 of the SGX Catalist Rules.
Therefore, directors (whether executive, non-executive, or independent) have, both collectively and individually, a continuing duty to stay abreast of the company’s affairs, as well as comply with their continuing listing obligations to enable them to properly discharge their duties. In every circumstance, directors must exercise their own individual judgement in evaluating all facts and advice provided, in order to make considered decisions on the application of the Listing Rules, and not leave matters to be resolved by their co-directors or Management.
The test is an objective one – the question is whether the director has exercised the same degree of care, skill and diligence as a reasonable director found in his or her position. The standard is not lowered to accommodate any inadequacies in the individual’s knowledge or experience. If a director held himself or herself out to possess, or in fact possesses, some special knowledge or experience, the standard will be raised.
As mentioned earlier, disclosure is a key tenet in the disclosure-based regime. Directors should, where appropriate, disclose and explain the process, rationale and factors considered in arriving at their business decisions. This is particularly the case for interested person transactions and contentious or complex corporate actions or transactions. An example would be a complex corporate action such as a scheme of arrangement or a major corporate merger and acquisition where shareholders would need to be engaged including through an information session, virtual or otherwise, prior to the general meetings to engage shareholders on the commercial merits of the transaction and address material queries from shareholders on the transaction.
In this regard, SGX RegCo does not consider it sufficient for directors to state that the terms of a transaction are arrived at on a ‘willing-buyer willing-seller’ basis without proper due diligence on a transaction. Directors are also encouraged to disclose and explain whether they have considered other available options before deciding to pursue the transaction in question.
Directors cannot abdicate their responsibility just because professionals have been consulted on the relevant matter. Where directors are required to make a recommendation to shareholders, directors should not proffer a bald statement that the board had considered professional advice such as the independent financial adviser’s opinion without undertaking its own assessment. Directors should state its detailed basis for recommending shareholders to vote in favour of or accept the terms of the transaction.
In addition, the Board may seek external legal advice in relation to its disclosure obligations but the Board is expected to be familiar with the Listing Rule requirements and assess the reasonableness of the legal advice. The Board is ultimately responsible for the decision as to whether the information is material and requires immediate disclosure. SGX RegCo will not accept sole reliance on external legal advice or Management as justification that they have complied with their disclosure obligations.
The relationship between the Board and Management is critical, as directors need to work closely with Management to ensure the long-term success of the company, as well as continued compliance with the Listing Rules.[1] In this connection, directors must ensure that the company’s internal controls and policies are adequate and effective in ensuring that Management escalates material information to the Board in a timely manner. The Management (including the executive directors) must also ensure that material information in their possession is provided promptly to the Board (including the independent directors).
While Management (including the executive directors) has a concomitant duty to provide the Board with complete, adequate and timely information, directors cannot plead ignorance if the circumstances are such that it would be reasonable to make further inquiries. Such circumstances include instances where directors are put on notice that the company is undergoing material or adverse developments that require close monitoring to ensure compliance with the Listing Rules.
Passively relying on information volunteered by Management or relying uncritically on advice by professionals (or that professionals did not provide such advice) cannot be considered sufficient in and of itself in certain circumstances. Rule 719(1) of the Listing Rules states that an issuer should have adequate and effective systems of internal controls (including financial, operational, compliance and information technology controls) and risk management systems. These internal controls are critical to ensure that the company promptly discloses material information. The internal controls should also be reviewed to ensure that they continue to be effective to mitigate these risks.
While directors may delegate particular functions to those below them in the management chain (subject to the company’s constitution), and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions. In all instances, directors must have directed their minds to the decision at hand, and be shown to have applied proper judgement of the facts before them.
Conclusion
SGX RegCo’s expectations of directors under the Listing Rules are consistent with what is expected of them under law: (a) the duty to act in good faith and in the best interests of the company, (b) the duty to avoid conflicts of interest, and (c) the duty to exercise due care, skill and diligence.
SGX RegCo may take action where there are breaches of directors’ duties under the Listing Rules. In addition, SGX RegCo may consider the director’s suitability for appointment, and may require the resignation of a director or object to his or her appointment in any issuer under the enhanced enforcement framework which took effect from 1 August 2021. Breaches of directors’ duties can result in criminal prosecution and civil action against the directors under the Companies Act 1967. In appropriate cases, SGX RegCo may refer such breaches to the relevant authorities.
Tan Boon Gin is CEO of SGX RegCo; Michael Tang is SGX RegCo’s head of listing policy and product admission
