Building a good governance culture - 18 Aug 2015 08:57 by Francis Kan

Building a good governance culture

18 Aug 2015 08:57 by Francis Kan

The onslaught of new technologies and an increasingly porous business world has made the task of building a culure of good governance a more complex one for organisations.

Companies find themselves having to frequently disrupt their business models and innovate to meet their customers’ needs and keep their competitive edge. In such an environment, company boards must ensure that their corporate governance infrastructure and culture are robust enough to cope with the volatility. 

"It is key for the board to be prepared, anticipate and react quickly to the inherent risks that the complex business world has brought and will bring," says Philip Yuen, CEO of Deloitte Singapore. 

"In order to do so, the board should take a more active role in risk management and know the best ways to mitigate the risks that might affect the company, such as cyber risk and reputation risk." 

While having the right tone at the top is an important starting point, the ability for such thinking to filter down the ranks of the organisation is just as critical. 

"Good governance starts with strong direction and commitment from the Chairman. It requires clear consequence management with evidence of taking action when non-compliances occur. Equally important is ‘tone at the middle’ with middle management taking on the role of advocates and champions for good governance," argues Irving Low, Partner and Head of Markets at KPMG Singapore. 

For instance, middle managers must have the courage to sack top salesman if they are found to have offered bribes, he notes. 

Room for Improvement

While there have been improvements in corporate governance among Singapore companies in recent years, industry watchers believe that the pace of progress can be quicker. This is key because corporate governance decisions can impact an organization's reputation in ways that affect almost every stakeholder. 

Over the last six years, the annual Governance and Transparency Index rankings by CPA Australia and CGIO of the NUS Business School have identified a number of recurring issues that require improvements on the part of companies. Among them, board leadership and independence; nominating matters, remuneration matters, accountability and audit; as well as transparency and investor relations. 

Experts cite the availability of directors of the right calibre and experience as a key impediment to better governance. Singapore's Code of Corporate Governance recommends rigorous review of independent directors who have served the board for more than nine years.

Given the small pool of available and qualified talent, board renewal might prove to be a challenge for many publicly listed companies. To address the issue of quality, industry experts recommend training to be provided for governance issues, particularly for senior executives who have been identified by companies and are being groomed to sit on their boards. 

Related to the issue of director quality is the perennial lack of diversity on the boards of Singaporean companies. Having a diverse pool of talent on boards is seen as key to addressing the problems in an ever evolving business environment. 

"One way this is manifesting is the issue of gender diversity, but I would hate to think that diversity is purely about gender composition. Companies need to be more open about the stereotypes of people that they would bring onto their boards," says Themin Suwardy, Associate Professor of Accounting (Practice) at the Singapore Management University. 

Another obstacle to good governance is the rising cost of compliance. Companies are faced with an ever-growing burden in maintaining compliance with new and revised regulatory requirements. 

Some of this cost may come from the need to set up infrastructure and systems of compliance within the company, the preparation required for more frequent and intrusive examinations by the regulators, and higher penalties for non-compliance. 

"While this cost may be unavoidable, there are ways to minimise it and understand the reasons behind the changes. This can be done by having ears on the ground that help listen out for industry feedback on the new regulations and also for news of impending regulatory changes," advises Mr Yuen, who is also who is also Divisional President for Singapore at CPA Australia. 

Meanwhile, Neo Sing Hwee, Advisory Partner at EY in Singapore, believes that building a robust corporate governance culture is not just about good reporting governance is but good business as well. 

"There needs to be a clearer and stronger relationship between the efforts invested by management and the outcomes and benefits of effecting good governance practices," he says.  

An Ongoing Journey

There is no doubt that today's directors of public companies are under greater pressure than ever before, with unprecedented scrutiny by investors who are seeking greater accountability and transparency, and by regulators who have intensified their focus on matters of corporate governance and corporate responsibility 

As such, directors need to be equipped with adequate and relevant skills and knowledge to be able to understand and analyse the information and challenge management decisions as appropriate. This should be supplemented with additional expertise such as those from internal and external auditors in terms of industry specific insights, governance and regulatory developments and trends, as well as leading practices. 

Says Mr Neo: "The journey towards better governance is never ending; it is a process, rather than a means to an end, which is changing and evolving as a result of developments in the global economic and business environment, as well as geopolitical circumstances."