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The Singapore Law Gazette

Revision of the Singapore Code of Corporate Governance

A Shift from the “Shareholder Primacy” Model to the “Enlightened Shareholder Value” Model?

This article looks at the recent amendments to the Singapore Code of Corporate Governance with respect to the new requirement for the boards of Singapore-listed companies to consider and balance the needs and interests of material stakeholders to ensure that the best interests of the company are served. This new requirement took effect for annual reports covering financial years commencing from 1 January 2019. What are the implications of this change, if any, to the corporate governance framework in Singapore?

Following the recent review of the Singapore Code of Corporate Governance by the Corporate Governance Council, the Monetary Authority of Singapore (MAS) issued the revised Code of Corporate Governance (the 2018 Code) on 6 August 2018, which took effect for annual reports covering financial years commencing from 1 January 2019. The 2018 Code, which applies to Singapore-listed companies on a ‘comply-or-explain’ basis, has introduced a new principle as follows: “The Board adopts an inclusive approach by considering and balancing the needs and interests of material stakeholders, as part of its overall responsibility to ensure that the best interests of the company are served.” (the Stakeholder Principle).1 Monetary Authority of Singapore ‘Code of Corporate Governance’ (6 August 2018), Principle 13. As stated in the consultation paper issued by the MAS, a company’s long-term success is influenced by its “ability to foster and maintain effective relationships with not just shareholders but also other stakeholders such as employees, customers, suppliers, creditors, regulators, and the broader community”.2 Monetary Authority of Singapore ‘Consultation Paper on Recommendations of the Corporate Governance Council’ (16 January 2018) at 18. While this appears to denote a shift from a ‘shareholder primacy’ corporate model to one that is more stakeholder-oriented, it is not entirely clear whether this change will (or was even intended to) lead to a paradigm shift in Singapore’s corporate governance in practice for several reasons as examined below.

The Legal Position Prior to the 2018 Code

Under Singapore law, the requirement for a director to “act honestly” under section 157(1) of the Companies Act has been held to enshrine the director’s common law duty to act bona fide in the best interests of the company (the best interests duty),3Ho Yew Kong v Sakae Holdings Ltd (2018) 2 SLR 333, (2018) SGCA 33 at (134). which has traditionally referred to the interests of the company’s shareholders collectively.4Re S Q Wong Holdings (Pte) Ltd (1987) SLR(R) 286, (1987) SGHC 58 at (36). In practical terms, this often means whether the commercial interests of the company as a corporate entity are advanced as determined subjectively by the board in its business judgment.5Vita Health Laboratories Pte Ltd and others v Pang Seng Meng (2004) 4 SLR(R) 162, (2004) SGHC 158; ECRC Land Pte Ltd v Ho Wing On Christopher (2004) 1 SLR(R) 105, (2003) SGHC 298. The Companies Act, however, permits, but does not prescribe, directors to have regard to “the interests of the company’s employees generally, as well as the interests of its members”.6 Companies Act (Cap 50, 2006 Rev Ed), section 159. Except in the case where the company is insolvent or near insolvency, in which case, creditors’ interests need to be taken into account,7Liquidators of Progen Engineering Pte Ltd v Progen Holdings Ltd (2010) 4 SLR 1089, (2010) SGCA 31. directors are not generally required to consider non-shareholder interests of the company. On this basis, the introduction of the Stakeholder Principle would appear to denote a shift from a ‘shareholder primacy’ model to an ‘enlightened shareholder value’ model by requiring directors to take into account non-shareholder interests as a means of enhancing shareholder value over the long term.8 Mihir Naniwadekar and Umakanth Varottil, ‘The Stakeholder Approach Towards Directors’ Duties Under Indian Company Law: A Comparative Analysis’ (August 2016) NUS Centre for Law & Business Working Paper 16/03.

Nevertheless, if this new requirement is understood in its proper context, it may be argued that it goes little further than to explicate what has been implicit in the common law, which has acknowledged that the reality of corporate decision-making in promoting the interests of the company often requires directors to consider and balance a wide range of interests depending on the situation involved.9 See Richard Williams, ‘Enlightened Shareholder Value in UK Company Law’ (2012) 35(2) UNSW Law Journal 360. The courts have thus recognised that what amounts to ‘the company’s interests’ is likely to vary in different contexts10Brady v Brady (1988) BCLC 20 at 40. and does not simply mean profit maximisation or profit maximisation by any means.11Ho Kang Peng v Scintronix Corp Ltd (2014) 3 SLR 329 at (40). Directors may also prefer the company’s interests “as a commercial entity over the interests of the shareholders and employees as individuals”.12Raffles Town Club Pte Ltd v Lim Eng Hock Peter (2010) SGHC 163 at (162). This is reflected in a recent study which found that a large majority of directors in Singapore surveyed (86 per cent) disagreed that the best interests duty required a director “to consider only the interests of the shareholders”, with a similar majority (91 per cent) agreeing that a “director is permitted to take into account the interests of stakeholders other than shareholders when performing this functions”.13 Pearlie Koh and Hwee Hoon Tan, ‘Directors’ Duties in Singapore: Law and Perceptions’ (Forthcoming) Asian Journal of Comparative Law.

The requirement under the Stakeholder Principle for the board to have regard to the interests of material stakeholders is also arguably circumscribed by the vague nature of the principle – it is not entirely clear what “considering and balancing the needs and interests of material stakeholders” would entail in practice. Further, notwithstanding the broad nature of the Stakeholder Principle, the supporting provisions and Practice Guidance appear to limit its potential scope by requiring only companies to put in place means by which they may engage, manage and communicate with their material stakeholders from a public relations perspective.14 Code of Corporate Governance, supra note 1, Provisions 13.1-13.3; Monetary Authority of Singapore, ‘Practice Guidance’ (6 August 2018), Practice Guidance 13. It appears that the Stakeholder Principle does not require companies to keep a record in the board minutes that the board has considered the views of material stakeholders in its decision-making. The extent to which the Stakeholder Principle would lead to more than a perfunctory public relations exercise with boards giving (or being required to give) the views of the company’s material stakeholders detailed and meaningful consideration in its decisions, thus, remains to be seen.

There may also be some doubt as to the weight that boards should attach to the interests of material stakeholders as between themselves and as between them and shareholders. Here, it would appear from the wording of the Stakeholder Principle that the board has the discretion to balance all competing interests so long as it arrives at a decision which is in the company’s best interests. It may be asked whether the board may invoke the Stakeholder Principle in the event of a corporate takeover to recommend that shareholders reject a takeover price which is at a substantial premium to the market price in view of the potential implications for its material stakeholders. While directors of a listed offeree company have the statutory duty to comply with the Singapore Code on Take-overs and Mergers15 Securities and Futures Act (Cap 289, 2006 Rev Ed), section 139(4). which requires them to have regard to the collective interest of shareholders,16 Securities Industry Council, ‘Singapore Code on Take-overs and Mergers’ (24 January 2019), General Principle 13. it would seem that the Stakeholder Principle requires the board to serve the best interests of the company by recommending a good offer to shareholders only after having considered the interests of the company’s material stakeholders, such as its employees, beforehand. By the same token, it may also be argued that after having considered the potential implications of the offer for its material stakeholders, such as the risk of employees being laid off from the takeover, the board may decide not to proceed with recommending the offer if it is not satisfied that the offer would ultimately be in the interests of the company as a corporate entity even if it may benefit shareholders.17 It has been suggested that the board is not precluded from doing so under the Singapore Code on Take-overs and Mergers: see Wan Wai Yee and Umakanth Varottil, Mergers and Acquisitions in Singapore: Law and Practice (Singapore: LexisNexis, 2013) at 349-352.

Comparative Developments

One may have a better perspective of the scope of the Stakeholder Principle (or limitations thereof) when viewed in light of similar developments in other jurisdictions. Notably, the Stakeholder Principle is less prescriptive than the corresponding principles in the G20/OECD Principles of Corporate Governance (2015) and the corporate governance codes of Australia, South Africa and Malaysia, which were referred to in the consultation paper.18 Consultation Paper, supra note 2. The G20/OECD Principles states that: “The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.”19 Organisation for Economic Co-operation and Development, ‘G20/OECD Principles of Corporate Governance’ (OECD Publishing, 2015), Principle IV. This requirement, it states, encompasses the development of mechanisms for participation and information rights by employees with respect to corporate decision-making, whistleblowing about the company’s illegal and unethical practices, and enabling effective redress of violation of stakeholder rights where protected by law.20Ibid. See also Principle VI (C). Similarly, Australia’s current third edition of the Corporate Governance Principles and Recommendations, which applies on a similar ‘if not, why not’ basis,21 ASX Listing Rules, rule 4.10.3. sets out stakeholder interests as part of the requirements by the listed entity to act ethically and responsibly and establish a sound risk management framework.22 ASX Corporate Governance Council, ‘Corporate Governance Principles and Recommendations’ (3rd edition), Principles 3 and 7. Under the current consultation process in Australia, the ASX Corporate Governance Council has proposed that the Corporate Governance Principles and Recommendations be amended to set out the requirement for the listed entity to have regard to the views and interests of “a broader range of stakeholders than just its [shareholders]” as part of its “social licence to operate”, and the requirement to instil and reinforce a culture “of acting lawfully, ethically and in a socially responsible manner”. This would include adopting a code of conduct for its directors, senior executives and employees, a whistle-blower policy and an anti-bribery policy.23 ASX Corporate Governance Council, ‘Corporate Governance Principles and Recommendations’ (4th edition, Consultation draft), Principle 3. South Africa’s King IV Code on Corporate Governance provides that the board should adopt a “stakeholder-inclusive approach” under which it “gives parity to all sources of value creation, including among others, social and relationship capital as embodied by stakeholders”, instead of prioritising the interests of shareholders.24 Institute of Directors in Southern Africa NPC, ‘King IV Report on Corporate Governance for South Africa, 2016’ at 25 and Principle 16. See also Securities Commission Malaysia, ‘Malaysian Code on Corporate Governance’ (April 2017) at Intended Outcomes 3.0, 5.0, 10.0 and 11.0.

Perhaps, most notably, the UK is one of the few jurisdictions which has imposed a prescriptive requirement reflecting the principle of ‘enlightened shareholder value’25 Williams, supra note 9. in the form of a legislative requirement under section 172 of the Companies Act 2006, which came into force in 2007 following a wide-ranging review of UK company law by the Company Law Review Committee.26 Company Law Review Steering Group, ‘Modern Company Law for a Competitive Economy: Developing the Framework’ (London, 2000). The provision states:

“(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—(a) the likely consequences of any decision in the long term, (b) the interests of the company’s employees, (c) the need to foster the company’s business relationships with suppliers, customers and others, (d) the impact of the company’s operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company.

(2) Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.

(3) The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.

The previous legislative formulation under section 309 of the Companies Act 1985 which was repealed had provided that the matters to which directors are to have regard to “include the interests of the company’s employees in general, as well as the interests of its members”. Notwithstanding the new legislative formulation, it has been argued that it is by no means certain that this has changed the extent to which stakeholders’ interests have been taken into account, with some suggesting that the contrary has been achieved, with the amendments embedding the concept of ‘shareholder primacy’ more firmly than before.27 David Collison, et al., ‘Financialization and Company Law: A Study of the UK Company Law Review’ (2014) 25 Critical Perspectives on Accounting 5. Nevertheless, UK case law suggests that the provision serves as a reminder that directors should at least give proper consideration to the interests of stakeholders even if ultimately the board needs to determine what is in the best interests of the company for the benefit of its members: see R (People & Planet) v. HM Treasury (2009) EWHC 3020 (Admin); Shepherd v Williamson (2010) EWHC 2375 (Ch). To this end, the new UK Corporate Governance Code 2018, which also operates on a similar ‘comply-or-explain’ basis and took effect for accounting periods from 1 January 2019, has introduced a new requirement that: “In order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties.”28 Financial Reporting Council, ‘UK Corporate Governance Code’ (July 2018), Principle D. Pursuant to this, the “board should understand the views of the company’s other key stakeholders and describe in the annual report how their interests and the matters set out in section 172 of the Companies Act 2006 have been considered in board discussions and decision-making.”29Ibid, Provision 5. Further, to engage with the workforce, the code prescribes that the company should either have a director appointed from the workforce, a formal workforce advisory panel or a designated non-executive director, or otherwise explain what alternative arrangements it has in place and why it considers them to be effective.30Ibid.

When viewed in light of these comparative developments, the Stakeholder Principle evidently contemplates less stakeholder participation or board accountability to stakeholders as compared with the corresponding requirements in the UK, Australia, South Africa and Malaysia. Instead, stakeholder engagement pursuant to the 2018 Code is stated by the Corporate Governance Council to serve as a “complement” to and “form part of the basis of” companies’ sustainability reports;31 Monetary Authority of Singapore, ‘Response to Feedback Received on Recommendations of the Corporate Governance Council’ (6 August 2018) at 21; Practice Guidance, supra note 14, Practice Guidance 1. On this basis, it may be viewed as an extension of a company’s existing disclosure requirements under the sustainability reporting framework with respect to the manner in which its business is conducted with respect to environmental, social and governance factors.32 SGX Mainboard Rules, rules 711A and 711B, Practice Note 7.6 Sustainability Reporting Guide. If the broader objective underlying the introduction of the Stakeholder Principle is to improve the company’s corporate governance and social responsibility practices by providing stakeholders with a constructive voice or role in corporate decision-making, the reforms would be a work in progress requiring further refinement in order for it to be effective in improving corporate decision-making and promoting the long-term success of the company. This includes setting out more clearly the types of policies and practices the company should put in place in order to manage stakeholder expectations effectively, as well as the requirement to disclose in its annual report how stakeholder interests have been considered in board discussions and decision-making. It may be noted that the previous Code of Corporate Governance 2012 had provided that: (i) the board’s role is “to set the company’s values and standards (including ethical standards), and ensure that obligations to shareholders and other stakeholders are understood and met”; and (ii) its commentary in the company’s annual report “should include information for stakeholders to make an informed assessment of the company’s internal control and risk management systems”.33 Monetary Authority of Singapore, ‘Code of Corporate Governance’ (2 May 2012), Guidelines 1.1(e) and 11.3.  These provisions have been removed from the 2018 Code, but it is unlikely that this was intended to dilute the company’s engagement with stakeholders. This may be justified on the basis that stakeholders – especially employees – and not only shareholders, have an important stake in and are instrumental to the company’s corporate governance and success.

Concluding Views

To be sure, the Stakeholder Principle is a constructive development insofar as requiring the board at least in principle to consider a wider range of stakeholder interests may reduce the risk of short-termism and lead to an improvement in the quality of board decisions to the extent that directors may adopt a more informed and balanced view as to what the company’s long term best interests are, which, in turn preserves and enhances shareholder value over the long term. Indeed, the study mentioned earlier found that a majority (66.7 per cent) considered that they owe their duties as directors to the shareholders (as opposed to the company), while more than 40 per cent of the respondents would go so far as to act according to the instructions of majority shareholders.34 Koh and Tan, supra note 13. However, whether this can lead to a meaningful change in an issuer’s corporate governance and social responsibility under the revised framework is dependent on the quality of disclosures pursuant to the 2018 Code and the sustainability reporting requirements which were introduced only recently. Under the revised SGX Listing Manual, issuers are now required to comply with the principles of the 2018 Code or where their practices vary from any provisions of the 2018 Code, to “explicitly state, in its annual report, the provision from which it has varied, explain the reason for variation, and explain how the practices it had adopted are consistent with the intent of the relevant principle”.35 SGX Mainboard Rules, rule 710. Such disclosures may make companies more responsive to the concerns of influential stakeholders and lead to positive improvements in corporate behaviour, even if in practical terms, such results may be limited as the 2018 Code is not enforceable in itself and the board is ultimately answerable most directly to the company’s shareholders as their appointors and would therefore be naturally driven by the company’s financial results and share price as the primary, if not determinative, factor in its commercial decision-making. Therefore, in the event of any factional conflicts, shareholder interests are likely to take precedence and the board is likely to take into account stakeholder interests to the extent that they do not diverge from the overarching corporate objective of advancing the interests of the company, which for all intents and purposes in most cases refers to the maximisation of shareholder value.36 See Collison, supra note 27. Following from this, however, it may be asked whether the advancement of stakeholder interests at the expense of corporate benefit is the appropriate function of the best interests duty. This arguably undermines the fiduciary paradigm on which directors’ duties are premised and the core duty of loyalty to the company.37 See Rosemary Teele Langford, ‘Best Interests: Multifaceted but Not Unbounded’ (2016) 75 Cambridge Law Journal 505; Modern Company Law for a Competitive Economy, supra note 24 at (3.24). Whilst the board should take into account the legitimate interests of the company’s key stakeholders in a principled manner, it should ultimately be able to justify its decisions based on the corporate benefit to the company as a corporate entity.

The author would like to thank Associate Professor Umakanth Varottil and Associate Professor Pearlie Koh for their comments.

Endnotes   [ + ]

1. Monetary Authority of Singapore ‘Code of Corporate Governance’ (6 August 2018), Principle 13.
2. Monetary Authority of Singapore ‘Consultation Paper on Recommendations of the Corporate Governance Council’ (16 January 2018) at 18.
3.Ho Yew Kong v Sakae Holdings Ltd (2018) 2 SLR 333, (2018) SGCA 33 at (134).
4.Re S Q Wong Holdings (Pte) Ltd (1987) SLR(R) 286, (1987) SGHC 58 at (36).
5.Vita Health Laboratories Pte Ltd and others v Pang Seng Meng (2004) 4 SLR(R) 162, (2004) SGHC 158; ECRC Land Pte Ltd v Ho Wing On Christopher (2004) 1 SLR(R) 105, (2003) SGHC 298.
6. Companies Act (Cap 50, 2006 Rev Ed), section 159.
7.Liquidators of Progen Engineering Pte Ltd v Progen Holdings Ltd (2010) 4 SLR 1089, (2010) SGCA 31.
8. Mihir Naniwadekar and Umakanth Varottil, ‘The Stakeholder Approach Towards Directors’ Duties Under Indian Company Law: A Comparative Analysis’ (August 2016) NUS Centre for Law & Business Working Paper 16/03.
9. See Richard Williams, ‘Enlightened Shareholder Value in UK Company Law’ (2012) 35(2) UNSW Law Journal 360.
10.Brady v Brady (1988) BCLC 20 at 40.
11.Ho Kang Peng v Scintronix Corp Ltd (2014) 3 SLR 329 at (40).
12.Raffles Town Club Pte Ltd v Lim Eng Hock Peter (2010) SGHC 163 at (162).
13. Pearlie Koh and Hwee Hoon Tan, ‘Directors’ Duties in Singapore: Law and Perceptions’ (Forthcoming) Asian Journal of Comparative Law.
14. Code of Corporate Governance, supra note 1, Provisions 13.1-13.3; Monetary Authority of Singapore, ‘Practice Guidance’ (6 August 2018), Practice Guidance 13.
15. Securities and Futures Act (Cap 289, 2006 Rev Ed), section 139(4).
16. Securities Industry Council, ‘Singapore Code on Take-overs and Mergers’ (24 January 2019), General Principle 13.
17. It has been suggested that the board is not precluded from doing so under the Singapore Code on Take-overs and Mergers: see Wan Wai Yee and Umakanth Varottil, Mergers and Acquisitions in Singapore: Law and Practice (Singapore: LexisNexis, 2013) at 349-352.
18. Consultation Paper, supra note 2.
19. Organisation for Economic Co-operation and Development, ‘G20/OECD Principles of Corporate Governance’ (OECD Publishing, 2015), Principle IV.
20.Ibid. See also Principle VI (C).
21. ASX Listing Rules, rule 4.10.3.
22. ASX Corporate Governance Council, ‘Corporate Governance Principles and Recommendations’ (3rd edition), Principles 3 and 7.
23. ASX Corporate Governance Council, ‘Corporate Governance Principles and Recommendations’ (4th edition, Consultation draft), Principle 3.
24. Institute of Directors in Southern Africa NPC, ‘King IV Report on Corporate Governance for South Africa, 2016’ at 25 and Principle 16. See also Securities Commission Malaysia, ‘Malaysian Code on Corporate Governance’ (April 2017) at Intended Outcomes 3.0, 5.0, 10.0 and 11.0.
25. Williams, supra note 9.
26. Company Law Review Steering Group, ‘Modern Company Law for a Competitive Economy: Developing the Framework’ (London, 2000).
27. David Collison, et al., ‘Financialization and Company Law: A Study of the UK Company Law Review’ (2014) 25 Critical Perspectives on Accounting 5. Nevertheless, UK case law suggests that the provision serves as a reminder that directors should at least give proper consideration to the interests of stakeholders even if ultimately the board needs to determine what is in the best interests of the company for the benefit of its members: see R (People & Planet) v. HM Treasury (2009) EWHC 3020 (Admin); Shepherd v Williamson (2010) EWHC 2375 (Ch).
28. Financial Reporting Council, ‘UK Corporate Governance Code’ (July 2018), Principle D.
29.Ibid, Provision 5.
30.Ibid.
31. Monetary Authority of Singapore, ‘Response to Feedback Received on Recommendations of the Corporate Governance Council’ (6 August 2018) at 21; Practice Guidance, supra note 14, Practice Guidance 1.
32. SGX Mainboard Rules, rules 711A and 711B, Practice Note 7.6 Sustainability Reporting Guide.
33. Monetary Authority of Singapore, ‘Code of Corporate Governance’ (2 May 2012), Guidelines 1.1(e) and 11.3.
34. Koh and Tan, supra note 13.
35. SGX Mainboard Rules, rule 710.
36. See Collison, supra note 27.
37. See Rosemary Teele Langford, ‘Best Interests: Multifaceted but Not Unbounded’ (2016) 75 Cambridge Law Journal 505; Modern Company Law for a Competitive Economy, supra note 24 at (3.24).

Research Associate, Centre for Asian Legal Studies, Faculty of Law
National University of Singapore, Singapore
E-mail: lance_ang@nus.edu.sg