Company LawINTRODUCTIONA study (Dieleman, Wiwattanakantang, & Jungwook, 2011)on SGX-listed companies in 2010 states that family-owned company constituted 52 percent of the 743 SGX-listed companies. Another study conducted by Credit Suisse shows an even larger majority that 63% of SGX-listed companies are family-owned. (Credit Suisse, 2011) These studies further reinstated the importance of family-owned companies to Singapore economy. Ironically, it was to be note that despite their importance, good governance practice was not complied with as family-owned companies scored poorly on GTI index with only 3 companies in Top 20. (Tan J. , 2012) Furthermore, key positions in the companies are mostly held by own family members. This resulted in them holding the centralised power which raised issue on abuse of power at the expense of the minority shareholder.
The recent revisions to Code of Corporate Governance (the “Code”) made key changes to areas of director independence, board composition, alternate directors and roles of nominating committee seeks to address this issue.
DIRECTOR INDEPENDENCERole of Independent Director- It was to be note that independent director was a widely accepted mechanism used to strengthen corporate governance by the companies. Independent directors could play a monitoring role in the company operation, management and also provide advice or recommendation to the management when necessary. (Tan C. H., 2004) They are to be able to act independently in the best interest of the company and all shareholders. Thus, independent director could be seemed as a “representative” of minority shareholder in the context of a family-owned business.
Revised code- The revised the Code stated in guideline 2.3 adopted the widely accepted concept of independence from substantial shareholders which was previously rejected in the last revision of the Code. Non-independent director will covered a border area including substantial shareholder and its immediate family. In addition, threshold of a non-independent director will be raised from 5% to 10% and period of transaction will be tightened to current or immediate past financial year.
Implications- It has significant impact to those family-owned businesses where shareholding are concentrated on the hands its family members (i.e. they are the dominating shareholders). The revision seeks to address situation where the family member of a director is appointed as independent director and further strengthen their controlling power of the company at the expense of the minority. It act as safeguard against dominating shareholders and allow minority shareholder interest to be better represented by an independent director. A percentage of 10% is of a more meaningful percentage as it is the threshold for shareholder to convene general meetings. In addition, by disassociate independence from substantial
s to such shareholders, the revision would have little or no effect if the shareholder were allowed to exert control without their consent; the majority of shareholders, as in SPSO, would have the ability to veto the new revision. Such a power would give power to their parent, and therefore shareholding. However, an independent director is not required to act with the majority of shareholders in SPSO. Therefore it would not affect the power of an independent director in any way, or even take away a shareholder’s full freedom to vote in SPSO. There would also be no other limitation to the board having an overall power to direct SPSO under the direction of an independent director. There is also no guarantee that this would benefit individual shareholders.
In a nutshell, the revision aims to ensure that the SPSO shareholder is treated fairly, but that it be provided with some autonomy in the management structure. It does not, to the extent that it would harm shareholder. When the shareholders are in a minority – a position that is currently controlled by one parent, and a position not held by the board – they could have the option of voting to approve some change that has the same meaning as a majority of the shareholders. If so, an independent director would be required during majority voting to approve or ignore such a significant change. Even so, as with SPSO, it doesn’t, and there has not been a formal review by the board.
There is no precedent for a majority shareholder having greater power to make decisions than a majority on matters relating to financial management, and SPSO, since the change could not have been carried out in a situation where the majority shareholder was being overruled by a lower-ranking director in a similar fashion to SPSO.
The shareholders have the choice of whether or not to support the changes in the shareholders’ interests or not. If they do support the changes, they might vote to go to a reconsideration and to vote for the revisions. If their decision is a majority on the shareholder’s behalf, the shareholders would have to provide the directors and committees with a formal explanation about why they voted against the changes. The changes could also be used to stop or delay an important change. Some would even be necessary to get new management to change. In such a case, they would also have the option of voting to block the changes altogether.
What will happen in the final bill?
This is a critical piece of the work to be completed before the end of the year. I don’t yet know where to start – for one thing, there is no definitive way to decide on whether the revisions will be implemented. Nevertheless, with the board still understaffed and with little time to set forth the details as to what will occur, I would urge us not to speculate about which revisions get implemented.
The first step forward is the introduction of the shareholder consent policy which will bring