DAVID GERALD, SECURITIES INVESTORS’ ASSOCIATION OF SINGAPORE
Interview by Abe De Ramos

David Gerald proudly wears the badge of shareholder activist. But far from the rabble-rousing breed, the former lawyer chooses to avoid litigation when taking companies to task, preferring to coax dialogues between corporate executives and the minority shareholders he represents as president of the Securities Investors’ Association of Singapore (SIAS). Since forming a small club of disgruntled investors of a de-listed company in 1999, Gerald has earned the respect of 66,000 individuals that now make up SIAS, no doubt the model for investor activism in Asia, where rubber-stamping the chairman’s decisions is the norm. Having influenced a number of votes against corporate shenanigans in the past – shaming their executives, including CFOs, in the process – SIAS is now consulted by company directors when minority shareholders vote on contentious issues. Today, Gerald is lobbying to improve corporate governance at its core: the boardroom. He wants changes in the way companies currently appoint independent directors, what he calls the “buddy-buddy system” in which majority shareholders appoint people with close personal relations. SIAS proposes that the Singapore Exchange (SGX) require companies to appoint only independent directors registered with the Singapore Institute of Directors (SID). He tells us why.

How would you describe the boardroom culture in Asia today?

In Asia, when family-owned companies list, the majority shareholders appoint their sons, daughters, cousins, uncles, and other relatives onto the board. Obviously, they want to continue to make decisions as a family. They forget that once they are listed, they are governed by the listing rules of the exchange, and the high standards of corporate governance by the market. In many parts of Asia, the owner of the company would also be the chairman and CEO. Companies rarely separate the role of the chairman and CEO. How do you chide the CEO if he does something wrong, if he is also the chairman?

By having strong independent directors?

It is a universal reality that majority shareholders decide who should sit on the board; the minority has very little or no input. In deciding who should sit on the board, majority shareholders tend to take someone who is like-minded, who will not give trouble to the board, and who will work with them hand-in-hand. While it is true the independent director must act in the interest of all shareholders, they must be vigilant in case of practices or moves that will jeopardize the interest of the minority shareholders. The majority shareholders are well taken care of, but the minority shareholders depend on independent directors. Corporate governance will take a backseat if independent directors are not able to stand up to the chairman and the other directors appointed by the majority shareholders, and set right that which is going wrong against the interests of the minority shareholders.

What mechanism do you suggest to ensure the appointment of truly independent directors, and to give the minority shareholders more say in their appointment?

The majority should not control the appointment mechanism. If the independent directors are appointed by the majority shareholders, they are beholden to the majority and will not be able to speak out. We think the Singapore Institute of Directors, which is a register of independent directors, should be consulted by companies. We are working towards getting the authorities to accept that the SID should have a say in the appointment process. If a company is looking for an independent director, the SID can recommend three; the board can then interview them and select one. Or the shareholders will decide at the meetings, but the board’s recommendations should come from, or be in consultation with, the SID. In other words, the board will be the legal authority or body to appoint, but the board will say to the shareholders, these three independent directors are selected from, and recommended by, the SID. The SID trains directors; they have courses and people can then register their names. They can be professionals like lawyers or accountants. That will make directors truly independent.

What is the best way to pay independent directors?

It depends on what function they are performing. If they are merely attending meetings, they get S$1,000 (US$650) to S$1,500 per meeting. But if it is a question of asking them to serve on various committees, they should be remunerated, on average, about S$60,000 per year. If not, they should get about S$30,000 to S$40,000, which is nothing in today’s context, given the responsibility and the work involved. In Singapore in the last three years, quite a number of people have been charged in court, one or two of them independent directors, so far. It’s an onerous job, but if you discharge your director’s duties in accordance with the law and in good conscience, you need not worry. Good corporate governance can only take a quantum leap if there is independence on the board. A board that is not independent – if it is in cahoots or is running on a buddy-buddy basis with senior managers – is a good recipe for corporate crime. Why? Because when senior managers and directors are involved in the day-to-day running [of a company] and working as buddies, there is no supervision, no accountability. That’s what happened with China Aviation Oil (CAO).

Can independent directors get paid in stock options?

It does happen, and that’s dicey. We’re not in favor of it, but there’s nothing to prevent companies from remunerating their independent directors with stock options. If directors are given stock options, there’s no reason why independent directors should not receive the same. But there is one school of thought that independent directors should not receive stock options because it does create a conflict. We have always been saying that it should be performance-based remuneration (for all directors) and not just a handout. That way, the interest of the minority shareholders and management will coincide.

You cited the case of China Aviation Oil, which was a massive failure in risk management. In cases like that, how much do independent directors have to answer for?

The board needs to formulate a policy on risk management, and the management needs to carry it out. But the independent directors will be sitting on the audit committee, and the audit committee will be empowered to work with senior management on the appropriateness and the effectiveness of the risk-management policy. So in that sense, there is an overseeing committee there. What happened in China Aviation Oil is the CEO sidestepped the audit committee, sidestepped the board, and was doing things himself. He was the law unto himself, so now he’s in jail. (The Singapore-listed CAO, majority-owned by the Chinese government, is under restructuring after incurring US$550m in derivatives-trading losses, covered up by company executives and overlooked by the audit committee, which includes independent directors.) Very often, failure in corporate governance results in corporate demise.

What happens if the execution of risk management fails in spite of the policy having been formulated by the board? Should independent directors worry about their liability?

No, directors cannot be held responsible so long as they have put in place the policy to have effective risk management. Nobody can envisage what’s going to happen. There’s no company anywhere in the world with fool-proof risk management. They can only do their best under the circumstances and keep improving as they go along. You can have a risk-management policy, but can you prevent people from stealing, from committing fraud? If a man is criminally minded, he will find ways to beat the system. That is something that we must accept as reality. Enron may happen again. CAO may happen again.

A number of other mainland China companies have been listing in Singapore. How do they measure up to your governance standards?

Chinese companies’ standards of corporate governance and transparency haven’t reached the level of Singapore Airlines, ST Engineering, or Keppel, even though they meet the minimum. Just look at their annual reports – they still do not understand that they need to be more transparent in terms of their financial information. They need to be meeting the press more; they need to be giving more information to the shareholders. They need to go the extra mile and engage in better shareholder communication. China will come to the party; it will improve as we go along.

They were conspicuously missing in your last corporate-governance awards.

Yes. We have a corporate-governance award that recognizes companies practicing the spirit of the law. For instance, the Corporate Governance Code of Singapore, which has 56 recommendations, says that one-third of the directors of a company should be independent. If you go beyond one-third, you get more marks. If you reveal the remuneration packages of the senior managers and directors you get extra marks. This way, we encourage companies to strive towards better governance. Singapore has been improving, but there is not much of an interest with regard to training directors. Board performance is not very good in terms of policy directions.

What are the most common ways that companies in Asia pre-empt minority shareholders’ rights?

It’s the tyranny of the majority. It’s always a question of the majority outvoting the minority at meetings. SIAS tries to overcome that by holding meetings with the board of directors, such as pre-AGM meetings or pre-privatization working meetings. Yesterday, for instance, a director of one company came to see us to complain that another company in which it owns shares doesn’t have enough independent directors. Companies are coming to see us to canvas issues such as privatizations, mergers, and rights offerings, usually to convince us of the fairness of the process.

How do you then influence the vote of the minority shareholders?

At SIAS we do not tell shareholders whether they should vote for or against; we only want to know that the process is correct. For instance, take PCRD. (PCRD is the Singapore-listed parent of Hong Kong telecom provider PCCW. Last December its majority shareholder, Richard Li, tried to block an attempt by a consortium to acquire PCCW.) We felt that Richard Li should abstain from voting. At first, SGX said it was not a related-party transaction. But we felt that he was too close to Francis Leung, and funding may be coming from the Li family. As it turned out, it was true. Second, we felt that there must be an independent financial advisor. Both were agreed to by SGX. In this case, SIAS played a role in ensuring that the process was correct. Now we leave it to the minority to vote; how they vote, we don’t tell them.

How would you summarize SIAS’s approach to shareholder activism?

I’ll give you the example of (agricultural products company) Golden Agri. We discussed the question of the unhappiness on the part of minority shareholders over directors’ fees. The company was losing money, but directors’ fees were going up. So we had a meeting here, and the directors agreed to cut the fees by 50%. We try to work with the majority through the board of directors, and try and get concessions. If SIAS comes out with a statement and lobbies support through the media, then the majority, through the board, will talk to us. We take a consensual approach, rather than a contentious approach. Taking a contentious approach will not make progress. Shareholder activism must be responsible and acceptable to all parties.