SM Goh Chok Tong at the Singapore Corporate Awards 2010

Good evening. I am glad that the Singapore Corporate Awards has gained in reputation since its inauguration in 2006. However, I cannot say the same for the global financial industry. Even now, the Greek sovereign debt crisis threatens to spread its contagion effects to the international financial markets.

Governance as a strategic advantage

Singapore must never end up with any sovereign debt problem. There will be no European Union to bail us out. And long before we call in the IMF, investors would have taken fright and capital taken flight.

So, let me reiterate the importance of good governance, both political and corporate.

One essential requirement of good governance is fiscal responsibility, in particular, not spending beyond your means. More than a balanced budget, given Singapore’s lack of resources, our small and open economy and our vulnerabilities to external events, we need to build up healthy reserves for a rainy day and to safeguard our future. But for our reserves during the recent financial storm, we would not have weathered it without mishap. For example, the government would not have been able to credibly guarantee bank deposits at short notice to prevent an outflow of funds to other financial centres, which offered such a guarantee. More importantly, we had the resources to roll out quickly bold schemes like the Jobs Credit scheme and SPURS¹. Together, these schemes helped companies to hold on to their workers, and to use the downturn to send their workers for training and upgrading. So, not only did we keep unemployment low through the crisis, but our companies were also able to ramp up quickly to meet the surge in orders when the global economy recovered.

Good governance is central to Singapore’s competitiveness as a business hub. Our hard-earned reputation for political stability, integrity, rule of law, sound accounting frameworks and a strong commitment to efficiency and effectiveness has made Singapore an attractive place for global businesses. For these reasons, the “Doing Business Report 2010” by the World Bank recently ranked Singapore as the country with the most conducive environment for business.

Encouraging better corporate governance

While the government has created this favourable environment, the corporate sector must build on it through good corporate governance. Though we also have a good reputation here, we can do more.

To raise standards, MAS established the Corporate Governance Council in February 2010. The Council will use the backdrop of the recent financial crisis to review Singapore’s Code of Corporate Governance. What lessons have we drawn? What needs to be updated? What are other jurisdictions doing? Can we adapt their solutions to suit our circumstances? How can we provide better guidance to directors and management on improving their corporate governance practices? How can we address gaps in the training and professional development of directors to promote higher standards of board performance? These are some questions that the Council will address.

Role of businesses

However, formal regulations and guidelines can only go so far. Neither the Code of Corporate Governance nor MAS’ Corporate Governance Regulations can spell out all the scenarios of good corporate governance. As you know too well, any corporation can write high-minded statements of corporate governance but the hard part is believing in and living those values. I will touch on three key areas in which you as corporate leaders can play a leading role in strengthening the values and practice corporate governance.

Substance over Form

First, corporate governance is not simply about complying with rules or reporting requirements. Boards of directors and senior management need to internalise the values, spirit and purpose behind the rules.

Take for example, the area of risk management. An OECD report in June 2009^[2] found that excessive emphasis appears to have been given to corporate risk reporting, without sufficiently considering how the information generated for risk reporting could be used for the companies’ strategies in growth and risk management. The corporate casualties during the global financial crisis showed how this could have devastating consequences. To prevent this, the board’s role must extend beyond corporate reporting to using the information to exercise proper oversight of risk management. This includes setting the risk appetite of the company and monitoring that risks are managed properly on an enterprise-wide basis.

Right Skills and MindNormalset

Second, good governance requires people with the appropriate skills and mindset. While having a comprehensive risk management framework is necessary, human expertise and judgement are equally important. One key learning point from the financial crisis was that financial institutions which experienced more significant problems during the crisis tended to apply a “mechanical” approach to risk management, without exercising expert judgement to challenge the outputs of quantitative risk models.

It is incumbent on boards to identify the skill sets required of directors and to keep those skill sets updated. Directors need to take personal responsibility to ensure that they devote sufficient time to attend relevant training and to apply their judgement well.

Setting the Right Tone

Lastly, boards of directors set the overall tone for the culture within their companies. Boards need to take a broader and a longer-term view when setting directions for their companies, balancing the drive to generate earnings with appropriate guidance on the level of their companies’ risk appetite. Remuneration structures must strike the right balance between incentivising profit-maximisation and discouraging excessive risk taking. Independent directors serve as a check and balance to management, ensuring that the interests of the company and its shareholders are protected. In financial institutions like banks and insurance companies, customers’ interests especially must be protected.

Conclusion

In conclusion, improving corporate governance is a collective responsibility. For Singapore to continue thriving as an international financial and business centre, it is incumbent on all corporate leaders to take ownership of this responsibility, and to lead by example at your companies. A study done by the Singapore Management University showed that investors are willing to pay a premium for companies with high standards of corporate governance. Therefore, it follows that the more accountable and transparent a company, the more likely institutional investors would invest in the company.

It is in this context that I commend the Singapore Exchange and Business Times for organising the Singapore Corporate Awards. Spotlighting good practitioners of corporate governance not only shows others that it can be done but also raises the bar for others to emulate. I congratulate the winners of the Singapore Corporate Awards tonight for your exemplary contributions to good corporate governance. May your success inspire others to do likewise.

Enjoy the evening ahead.

[1] Skills Programme for Upgrading and Resilience.