Corporate Governance of Different

Types of Entities

A/P Mak Yuen Teen

OUTLINE
Governance issues for different types of entities
Corporate governance of foreign listings
Corporate governance of financial institutions
MAJOR TYPES OF ENTITIES AND
GOVERNANCE ISSUES
Family Businesses (Family-Controlled and Managed)
Professionally-Managed Family Businesses
Family-Controlled Listed Companies
Jointly-Controlled Listed Companies
Listed Companies with Dispersed Ownership

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FAMILY BUSINESSES: STRENGTHS AND
WEAKNESSES

Family businesses are the oldest and most common

form of business organisation around the world

Research generally shows that family businesses

outperform non-family businesses

However, research also shows that most family

businesses have a short life-span beyond the founders
stage and it has been estimated that 95 percent of
family businesses do not survive the third generation
of ownership

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FAMILY BUSINESSES: STRENGTHS AND
WEAKNESSES
Their success has often to do with commitment,
knowledge continuity, and importance placed on
preserving reputation/family pride

Their failure has often to do with lack of preparation of

the subsequent generations to handle the demands of a
growing business and a much larger family

Managing both family governance and business

governance issues are important for success of a family
business

6
GOVERNANCE OF FAMILY BUSINESSES: KEY
CHALLENGES

Loss of family identity and values

Family conflicts
Current leaders inability to let go
Entitlement culture
Dilution of wealth (due to personal consumption and
breakup of business interests)

Adapted from Ernesto J. Posta, Family Governance: How Leading Families Manage The Challenges of Wealth, Family
Governance White Paper, Credit Suisse Group AG, 2012 and IFC Family Governance Handbook, IFC, 2008

7
Conflict In Family Businesses: Otsuka Kagu In
Japan
Daughter bests father in feud at Japan shareholder's meeting (Reuters, 27
Mar, 2015)
A rare family feud erupted in a Japanese shareholders meeting on Friday, when the
chief executive of Otsuka Kagu Ltd defeated her father's attempt to oust her,
vowing to push ahead with her plan to take the furniture retailer more mass-
market.
"I am sorry that things have come to this," Kumiko Otsuka, 47, coolly told
shareholders in the meeting, in which she instructed her father, company founder
and chairman Katsuhisa Otsuka, and her mother to identify themselves by name
and shareholder number.
The daughter overcame the chairman's challenge by an undisclosed majority vote.
"I had five children," the father said from the audience as he pleaded with
shareholders to back his return as CEO. "Kumiko was the first and she was a
difficult birth.
Ms Kumiko's mother also gave a rambling speech criticising the CEO, until
another shareholder yelled at her to stop.
Conflict in Family Businesses: Otsuka Kagu in
Japan
The Otsuka family showdown - virtually unheard of in Japan's highly scripted
shareholders' meetings - is Japan's first major proxy battle since the country
adopted corporate governance guidelines in time for this year's annual general
meetings. They require institutional investors to reveal how they vote.
The feud, which has gripped the public - one broadcaster carried parts of a
Kumiko Otsuka news conference live during a gossipy talk show - also highlights
the risk of failed succession planning at Japanese companies with high family
ownership.
Infighting at the company, which the 71-year-old Katsuhisa Otsuka founded in
1969, became public after Ms Kumiko began implementing her strategy to deal
with competition from the likes of Sweden's Ikea AB and domestic discount chain
Nitori Holdings Co.
The former banker, who succeeded her father as CEO in 2009, sought to ease
Otsuka Kagu's expensive policy of appointing sales staff for each customer, while
reducing mailed advertisements. She also opened small shops specialising in
Scandinavian furniture and aimed for more cheaper offerings.
Conflicts in Family Businesses: Otsuka Kagu in
Japan
"In order to build on the strengths of the past 40 years as a business, we need to
implement some reforms to keep up with today's consumers," said Kumiko,
who was backed by proxy advisory firms Institutional Shareholder Services and
Glass Lewis.
The daughter blames the father for last year's 1.4 billion yen (S$16 million)
operating loss. Katsuhisa Otsuka counters that his daughter was taking the
retailer downmarket.
She was ousted as CEO in July, when the previous board sided with her father,
who reversed some of her changes. She returned in January in what her father
has called a boardroom coup.
The father defended his record on Friday and criticised his daughter.
"What have I done wrong? If anything, it was in appointing her as CEO six
years ago," he said. "I'm disappointed."
One shareholder urged reconciliation.
"Old man, your daughter is pretty smart. I think she really cares about the
company," he said. "I would put an ad in the paper, with the two of you shaking
hands and saying you're sorry, and promise to sell furniture for the best price.
GOVERNANCE OF FAMILY BUSINESSES: KEY
CHALLENGES

Informality (lack of clear business practices and policies

and procedures)
Lack of discipline (e.g., lack of succession planning)
Lack of transparency
Lack of oversight/self-dealing

Adapted from Ernesto J. Posta, Family Governance: How Leading Families Manage The Challenges of Wealth, Family Governance
White Paper, Credit Suisse Group AG, 2012 and IFC Family Governance Handbook, IFC, 2008

11
+

Source: KPMG, Family Business: Planning for the Future, Sep/Oct 2013
Source: KPMG, Family Business: Planning for the Future, Sep/Oct 2013
FAMILY GOVERNANCE

Family governance is a system of joint decision-making, most often by a

board of directors and a family council, which helps the owner family
govern its relationship with its wealth and enterprises. It is often assisted
in this mission by a family constitution capturing the familys vision and
important family values, a family employment policy setting the
requirements for the employment of family members in the firm or family
office, an ownership structure that allows for corporate control, and
capable nonfamily managers that set a standard for the professional
management of the family enterprise. The desired outcome is rational
economic and family welfare decisions that are not overwhelmed by
traditional family dynamics.

Ernesto J. Posta, Family Governance: How Leading Families Manage

the Challenges of Wealth, Family Governance White Paper, Credit Suisse
Group AG, 2012

14
Ernesto J. Posta, Family Governance: How Leading Families Manage15
The Challenges of Wealth, Family Governance White Paper,
Credit Suisse Group AG, 2012
GOVERNANCE OF FAMILY BUSINESSES

Involvement of family members as shareholders,

directors, executives and/or employees
Some may be shareholders relying on dividends while
others may be executives/employees drawing salaries
therefore, the setting of salaries may be important
There may be a family constitution which sets out the
family vision, mission, values, and policies regulating
family members relationship with the business

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GOVERNANCE OF FAMILY BUSINESSES

There may be other governance institutions such as

family meetings, a family assembly/forum, family
office and family council
Important to clearly separate family matters from
business matters
Succession is a key issue

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PROFESSIONALLY-MANAGED FAMILY
BUSINESSES: KEY CHALLENGES

Preservation of Family/Founder Values

Treatment of Family Members and Professional
Managers
Agency Problem of Divergence of Interests of
Owners and Professional Managers
Mechanisms to Foster Performance and Commitment
of Professional Managers While Preserving Family/
Founder Values

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FAMILY-CONTROLLED LISTED COMPANIES:
KEY CHALLENGES

Separating roles of shareholders, directors and senior

management
Recruiting suitably qualified and truly independent
directors
Treatment/rights of minority shareholders
Related party transactions
Systems, controls, policies and procedures
Management reporting and financial reporting
External and internal audits
Corporate governance best practices

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JOINTLY-CONTROLLED LISTED COMPANIES:
KEY CHALLENGES

Board Representation of Different Shareholders

Different Interests of Major Shareholders

Potentially Better Check and Balance But Also Risk

of Shareholder Disputes

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LISTED COMPANIES WITH DISPERSED
OWNERSHIP: KEY CHALLENGES

Reduced Accountability of Board to Shareholders

Reduced Oversight of Management by Board

Dominant CEO

Excessive Management Remuneration

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REGULATORY ISSUES FOR FOREIGN
LISTINGS IN SINGAPORE

Source: SGX website

REGULATORY ISSUES FOR FOREIGN LISTINGS
IN SINGAPORE

Source: SGX website

REGULATORY ISSUES FOR FOREIGN LISTINGS
IN SINGAPORE

Scenarios for foreign listings

in Singapore:
Country of (a)Secondary listings
operation (b)Foreign companies
incorporated in Singapore
(c)Foreign companies
incorporated overseas

Country of
Country of
incorporation
listing
Source: SGX website
Source: SGX website
REGULATORY ISSUES FOR FOREIGN LISTINGS
IN SINGAPORE

Singapore Companies Act applies only to Singapore-incorporated

issuers
Securities and Futures Act applies to all issuers
SGX Listing Manual generally does not apply to secondary listings
(except Rule 217 and Rule 751)
Singapore Code of Corporate Governance which is subject to
comply or explain in Listing Manual applies only to primary
listings
Corporate Governance and Enforcement Challenges for Foreign
Listings
ENFORCEMENT CHALLENGES FOR
FOREIGN LISTINGS
Major foreign listings with significant issues:
Biotreat Technology (2007)
China Sun Bio-Chem Technology (2008)
China Printing & Dyeing (2008)
FibreChem Technologies Limited (2009)
Oriental Century (2009)
Sino-Environment (2009)
China Milk Products Group Limited (2010)
KXD Digital Entertainment Limited (2010)
New Lakeside (2010)
Sino Techfibre (2011)
China Hongxing Sports (2011)
Hongwei Technologies (2011)
China Gaoxian Fibre Fabric Holdings (2011)
China Sky Chemical (2011)
China Paper (2012)
Eratat Lifestyle (2014)
DMX Technologies (2015)
China Essence (2015)
35
CORPORATE GOVERNANCE OF FINANCIAL
INSTITUTIONS
Key rules applying to FIs:

Banking Act Banking (Corporate Governance) Regulations

2005 (mandatory)
Insurance Act Insurance (Corporate Governance) Regulations
2013 (mandatory)
Guidelines On Corporate Governance for Financial Holding
Companies, Banks, Direct Insurers, Reinsurers and Captive
Insurers Which Are Incorporated In Singapore (best practices)
Based on Code of Corporate Governance 2012 for listed companies with
some supplementary principles and guidelines
CORPORATE GOVERNANCE OF BANKS

Some key differences (mandatory) compared to listed companies:

Prior approval by MAS required for appointment of director, Board Chairman,
NC members, CEO, deputy CEO, CFO and CRO; notification also required for
all other committee members

Independence independence from substantial shareholders (>=5%) rather than

10% shareholders, and has not served on the board for a continuous period of 9
years or longer

MAS can over-rule the NCs determination of independence of a director

Foreign-owned banks incorporated in Singapore must have at least 1/3 directors

who are Singapore citizens/PRs and all other Singapore-incorporated banks
must have majority of directors who are Singapore citizens/PRs
CORPORATE GOVERNANCE OF BANKS

All Singapore-incorporated banks must have Chairman who is not an

executive director or an immediate family member of CEO

All Singapore-incorporated banks must have majority of independent

directors

All Singapore-incorporated banks must have AC, NC, RC and RMC, but if
subsidiary of another bank or insurer, need not have NC, RC and RMC if
functions performed by the board

If board of bank delegates powers to executive committee or another board

committee, the committee must meet similar independence requirements as
the board
CORPORATE GOVERNANCE OF BANKS

NC of foreign-owned Singapore-incorporated bank must have 3-5 directors;

5-7 directors for Singapore-owned bank; majority, including Chairman,
independent directors

RC at least 3 directors; majority, including Chairman, independent directors

AC at least 3 directors; majority, including Chairman, independent directors

RMC at least 3 directors; majority, including Chairman, non-executive

directors

Where single substantial shareholder owns 50% or more of shares or voting

power, board/NC/RC need at least majority who are independent from
management and business relationships and at least 1/3 who are independent
directors
UOB Board and Board Committees
CORPORATE GOVERNANCE OF INSURANCE
COMPANIES
Regulations generally similar to those for banks:
Regulations apply to direct insurers and reinsurers incorporated in Singapore
except marine mutual insurers

Stricter requirements for tier 1 insurer direct life insurer with total assets of at
least S$5 billion; direct general insurer or reinsurer with gross premiums of at
least S$500 million; others are classified as tier 2 insurers

Board must have at least 3 directors; tier 1 insurer needs at least majority of
independent directors; tier 2 insurer needs at least 1/3

Tier 1 insurer must have AC, NC, RC and RMC; AC, NC and RC - at least 3
directors; majority, including Chairman, independent; RMC at least 3 directors;
majority, including Chairman, non-executive directors

Tier 2 insurers board committee responsibilities can be undertaken by the

Board