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|The board and management of Sembcorp Industries are committed to maintaining high standards of corporate governance to preserve and enhance shareholder
value. The company recognises the important role that well-defined corporate governance processes play in enhancing corporate accountability and sustainability.
This report sets out the company’s corporate governance processes and activities for the financial year with reference to the principles set out in the Singapore Code of Corporate Governance 2005 (Code) and deviations from the Code are explained.
Effective board to lead and effect controls (Principle 1)
The fundamental responsibility of the directors is to exercise their judgement to act in what they reasonably believe to be the best interest of the company, for the creation of long-term value for shareholders. The board relies on the integrity and due diligence of senior management, external auditors and advisors to oversee the Group’s overall performance objectives, financial plans and annual budget, major investments, divestment and funding proposals, financial performance reviews, risk management and corporate governance practices.
To assist the board in the efficient discharge of its responsibilities and provide independent oversight of management, a number of board committees, including the Executive Committee, Audit Committee, Executive Resource & Compensation Committee, Nominating Committee and Risk Committee have been established. These committees are primarily made up of independent or non-executive directors. The committees’ respective roles and responsibilities are further explained in this report. Special purpose committees are also established as and when a need arises.
The composition of the board committees is structured to ensure an equitable distribution of responsibilities among board members, maximise the effectiveness of the board and foster active
participation and contribution. Diversity of experience and appropriate skills are considered along with the need to maintain appropriate checks and balances between the different committees. Hence, membership of the Executive Committee (ExCo), with its greater involvement in key business and executive decisions, and membership of the Audit and Risk Committees, with their respective oversight roles, is mutually exclusive.
Board meetings are held on a quarterly basis to review and approve the release of the quarterly results and discuss reports by management on Group’s performance, plans and prospects. Twice a year, the board also sets aside time during its scheduled meetings without the presence of management to discuss management’s performance. A board meeting is also held at the end of each financial year to consider and approve the Group’s budget for the following year. Further board meetings may also be held to specifically consider other issues arising. To assist directors in planning for their attendance at board and board committee meetings as well as at the Annual General Meeting (AGM), these are scheduled one year in advance, and telephonic attendance and conference via audio-visual communication are allowed under the company’s Articles of Association. The company recognises that
to focus on a director’s attendance at formal meetings alone may lead to a narrow view of a director’s contribution. Directors’ contributions may be made in many other forms, such as bringing strategic relationships to the Group and providing guidance to management or an exchange of views outside the formal environment of the board or board committee meetings. Notwithstanding this, the company encourages active participation at formal meetings of the board. In 2008, a total of nine board meetings were held, with an average of 79% attendance.
The Group has adopted a set of internal controls and guidelines that set out financial authorisation and approval limits for borrowings, including off balance sheet commitments, investments, acquisitions, disposals, capital and operating expenditures, requisitions and expenses. Under the financial authorisation and approval limits, approval sub-limits are provided at management levels to facilitate operational efficiency. Approval of the ExCo or board is required where the value of a transaction exceeds certain financial thresholds. The ExCo is chaired by Peter Seah Lim Huat and its members are Goh Geok Ling and Tang Kin Fei. It held four meetings in the year with the full attendance of its members.
The ExCo reviews and approves business opportunities, strategic investments, capital and operating expenditures and divestments. Within the limits of authority delegated by the board, it also evaluates and recommends larger investments, capital
and operating expenditures, as well as divestments to the board for approval.
Directors are briefed on changes to regulations and accounting standards from time to time either during board meetings or at specially convened sessions, including sponsored training sessions and seminars conducted by external professionals. Newly-appointed directors are given comprehensive presentations by management on the strategic direction and business activities of the Group. A formal letter is sent to newly-appointed directors upon their appointment explaining the Group’s governance policies and practices and their duties and obligations as directors. Facility visits to our subsidiaries’ premises are also arranged to provide newly-appointed directors an understanding of the Group’s business operations. Existing directors are also invited to participate in such facility visits and orientation programmes.
Strong and independent board exercising objective judgement (Principle 2)
The current board comprises eight directors. Six of the directors are independent directors, and with the exception of the Group President & CEO, all the directors are non-executive, including the Chairman, Mr Seah. Given that the majority of the board is comprised of non-executive directors who are independent of
management and independent in terms of character and judgement, objectivity on issues deliberated is assured.
The Nominating Committee (NC) ensures that the board maintains an appropriate size and comprises members with a balance of skill and experience. It takes care to ensure that directors have sufficient time to devote to their duties. Through the delegation
of its authority to the NC, the board has applied its best efforts to ensure that the directors appointed possess the background, experience and knowledge in business, finance, legal, related industry and management skills critical to the company’s businesses.
The board members comprise business leaders, professionals with financial backgrounds, a practicing lawyer and a senior officer of the public sector. Best efforts have also been made to ensure that, in addition to his special contribution, each director brings to the board an independent and objective perspective to enable balanced and well-considered decisions to be made. Click here for profiles of the directors.
The NC considers Lee Suet Fern an independent non-executive director notwithstanding her relationship with the company in respect of Guidance Note 2.1(d) of the Code. While Mrs Lee is the Senior Director of Stamford Law Corporation, which has rendered professional services to the Group, the NC is of the view that she is nonetheless able to exercise strong independent judgement in her deliberation in the
interest of the Company.
Chairman and Chief Executive Officer (Principle 3)
To ensure an appropriate balance of power such that no one individual represents a considerable concentration of authority, the roles of chairman and the Group President & CEO are separate. The Chairman and the Group President & CEO are not related to each other.
The Chairman, who is non-executive, leads and ensures effective and comprehensive board discussion on matters brought to the board including strategic issues as well as business planning and monitors the translation of the board’s decisions into executive action. Meanwhile, the Group President & CEO executes the board’s decisions and is responsible for implementing the Group’s strategies and policies and the conduct of the Group’s business.
Formal appointment and re-election of directors (Principle 4)
Sembcorp Industries’ board is periodically renewed to ensure strong, independent and sound leadership for the continued success of the company and its businesses. The board also recognises the contribution of directors
who, over time, have developed deep insights into the Group’s businesses. As such, the board would exercise its discretion to retain the services of such directors.
The company subscribes to the principle that all directors including the Group President & CEO should retire and submit themselves for re-election at regular intervals, subject to their continued satisfactory performance. The company’s Articles of Association require a third of its directors to retire and subject themselves to re-election by shareholders at every AGM (one-third rotation rule).
Prior to seeking shareholders’ approval at the AGM, the NC reviews and considers the retirement and re-election of directors. In addition, a newly-appointed director submits himself for retirement and election at the AGM immediately following his appointment. Thereafter, he is subject to the one-third rotation rule. Directors who are above the age of 70 are also statutorily required to seek re-appointment at each AGM.
Every year, the NC reviews the independence of directors. To this end, each director is required to complete a Director’s Independence Checklist on an annual basis to confirm his independence. The checklist is drawn up based on the guidelines provided in the Code and further requires each director to assess whether he considers himself independent despite not being involved in any of the relationships identified in the Code. The NC will then review the checklist completed by each director to determine whether the director is independent.
The NC supports and advises the company by nominating suitable board candidates to maintain the board’s balance of skills, knowledge and experience. Appointments to the board are made on merit and against objective criteria. Candidates must be able to discharge their responsibilities as directors while upholding the highest standards of governance practiced by the Group. The NC takes care to ensure that appointees have enough time available to devote to their directorship roles.
The NC is chaired by Mr Seah and its members in 2008 were Mr Goh and K Shanmugam, who resigned on April 25, 2008 following his appointment as a minister of the Singapore government. The NC met twice in 2008 and achieved an average of over 80% attendance. The NC Chairman is regarded as non-independent with reference to the definition of “independence” under the Code, given his seat on the Advisory Panel of Temasek Holdings, a substantial shareholder of the company. Notwithstanding this, the board believes that the NC Chairman’s ability to exercise strong independent judgement in his deliberations and act in the best interest of the company is not compromised, as his appointment to the Advisory Panel of Temasek Holdings is non-executive in nature and does not entail involvement in the day-to-day conduct of Temasek Holdings’ business.
Pursuant to the one-third rotation rule, Mr Seah and Mrs Lee will each submit themselves for retirement and re-election by shareholders at the forthcoming AGM.
Bobby Chin Yoke Choong, who was newly appointed to the board on December 1, 2008, will also submit himself for retirement and re-election at the forthcoming AGM. In addition, Richard Hale, OBE, who is above the age of 70, will also submit his retirement and offer himself for re-appointment pursuant to the Companies Act.
Active participation and valuable contributions are key to overall effectiveness of the board (Principle 5)
Each year, the board undertakes an informal assessment of its performance. To provide feedback to aid in this assessment, each director is required to complete a questionnaire on the effectiveness of the board as a whole. This questionnaire considers factors such as the size and composition of the board, directors’ access to information, board processes and accountability as well as board performance in relation to communication with senior management. Feedback from the questionnaire is subsequently discussed at a board meeting and used to highlight areas of strength and weakness for the future development of the board and its committees to further improve their performance.
The NC feels that the financial indicators set out in the Code as guides for the evaluation of the board are more a measure of the management’s performance and therefore are less applicable to directors. The NC believes that board performance is ultimately reflected in the long-term performance of the Group.
Directors have complete, adequate and timely information and resources (Principle 6)
To assist the board in discharging its duties, Sembcorp’s management furnishes adequate management and operation reports as well as financial statements to it on a regular basis. As a general rule, board and board committee papers are sent to directors at least three working days before each meeting so that they may better understand the matters prior to the meeting and discussions may be focused on questions that the directors have on these matters. Members of senior management who may provide insight into the matters at hand are also called on to be present at discussions relevant to them.
Financial highlights of the Sembcorp Group’s performance and key developments are presented on a quarterly basis at board meetings. The Group President & CEO, Group Chief Financial Officer and members of senior management are present at these presentations to address any queries which the board may have.
The Company Secretary assists the board with the preparation of meeting agenda and administers, attends and prepares minutes of board proceedings, ensuring good information flow within the board and its committees. She also assists the board on the compliance of the Group with the Memorandum and Articles of Association and regulations, including requirements of the Companies Act, Securities & Futures Act and the SGX-ST. She liaises with the SGX-ST, the Accounting and Corporate Regulatory Authority and when necessary, shareholders. Management also assists the board to implement and strengthen good corporate governance practices and processes across the Group.
The board has ready and independent access to the Group President & CEO, senior management, Company Secretary and internal and external auditors at all times. The board exercises its discretion to seek independent professional advice if deemed necessary to ensure that full information and advice is available before important decisions are made.
Remuneration of directors adequate and not excessive (Principle 7)
The Executive Resource & Compensation Committee (ERCC) is chaired by Mr Seah and its members for 2008 were Mr Goh and Mr Shanmugam, until his resignation on April 25, 2008. It held two meetings in the year and achieved an average of 83% attendance. The ERCC is responsible for ensuring a formal procedure for developing and reviewing policies on compensation and development of the Group’s senior management. It assists the board to ensure that competitive remuneration policies and practices are in place to attract, motivate and retain talented executives. The ERCC also reviews the remuneration of the non-executive directors and executive director.
The ERCC reviews succession planning for key positions in the Group and the leadership pipeline for the organisation. It reviews the development of senior staff and assesses their strengths and development needs based on the Group’s leadership competencies framework with the aim of building talent and maintaining strong and sound leadership for the Group. The ERCC conducts a succession planning review of the Group President & CEO, all of his direct reports and selected key positions in the company on an annual basis. Potential internal and external candidates for succession are reviewed for different time horizons of immediate, medium-term and long-term needs.
The ERCC also establishes guidelines on share-based incentives and other long-term incentive plans and approves the grant of such incentives to key executives. The underlying philosophy is to motivate executives to maximise operating and financial performance and shareholder value as well as to align the interests of the executives and shareholders.
The ERCC has access to expert professional advice on human resource matters whenever there is a need for such external consultations. In its deliberations, the ERCC takes into consideration industry practices and norms of compensation. The Group President & CEO is not present during the discussions relating to his own compensation, terms and conditions of service, or the review of his performance.
While the ERCC Chairman is not regarded as independent within the context of the definition of “independence” in the Code, he is a non-executive director independent of management with a clear separation of his role from management in deliberations of the ERCC. No ERCC member or any director is involved in deliberations in respect of any remuneration, compensation, share-based incentives or any form of benefits to be granted to himself.
Competitive reward system to ensure highest performance and retention of best talents and key executives (Principle 8)
Sembcorp believes that a competitive remuneration and reward system based on individual performance is important in order to retain and incentivise the best talents. Sembcorp’s remuneration and reward system is also responsive to the economic climate as well as the performance of the Group and its business units.
The Group President & CEO, as an executive director, does not receive director’s fees. As a lead member of management, his compensation consists of his salary, allowances, bonuses and share-based incentives conditional upon meeting certain performance targets. Details on the share-based incentives and the performance targets are available in the Directors’ Report and Note 4 in the Notes to the Financial Statements.
Non-executive directors have remuneration packages that consist of a director’s fee component pursuant to the company’s Directors’ Fee Policy, an attendance fee component and a share-based incentives component pursuant to the company’s employee share plans. The company does not have a retirement remuneration plan for non-executive directors. The Directors’ Fee Policy is based on a scale of fees divided into basic retainer fees and additional fees for attendance and service on board committees. The basis of the allocation of share-based incentives takes into account a director’s contribution and additional responsibilities on board committees. Details on share-based incentives granted to the non-executive directors and their fair value are available in the Directors’ Report and Note 4 in the Notes to the Financial Statements.
Key executives are rewarded based on actual performance relative to pre-agreed performance targets, which include financial and non-financial performance indicators such as economic value added (EVA), total shareholder return and promoting and maintaining health, safety and environment issues. The Group believes that the current reward systems are in line with market norms and formulated to motivate executives to give their best to the Group. Rewards include long-term share-based incentives, which would further ensure the retention of the most talented and high performing executives in the Group. For further details on the share-based incentives and performance targets please refer to the Directors’ Report and Note 4 in the Notes to the Financial Statements.
The Group has an incentive compensation plan for key executives that is tied to the creation of EVA, as well as to the attainment of individual and Group performance goals. A “bonus bank” is used to hold incentive compensation credited in any year. Typically, one-third of the available balance is paid out in cash each year, with the balance being carried forward to the following year. Such carried-forward balances of the bonus bank may either be reduced or increased in future, based on the yearly EVA performance of the Group and its subsidiaries.
Disclosure on remuneration (Principle 9)
To retain and motivate high calibre directors from Singapore and overseas to help the Group particularly in its overseas expansion, the company needs to compensate its directors in keeping with international standards and commensurate with the directors’ level of responsibility, performance and contributions to the Group. The directors’ fees are reviewed regularly and are subject to the approval of shareholders at the AGM. The report on directors’ remuneration is found in the related item under the Supplementary Information section of the financial statements in this report.
The directors’ fees totalled S$801,250 in 2008 (as compared to S$777,000 in 2007) and were derived using the fee structure below.
Our key executives’ remuneration may also be found under the Supplementary Information section of the financial statements in this report.
The board is accountable to the shareholders (Principle 10)
Sembcorp is committed to open and honest communication with shareholders at all times. Shareholders are provided with quarterly and annual financial reports in a timely manner that gives shareholders a balanced and understandable assessment of the company’s performance and prospect.
In line with stock exchange requirements, negative assurance statements were issued by the board to accompany its quarterly financial results announcements, confirming that to the best of its knowledge, nothing had come to the attention of the board which would render the company’s quarterly results false or misleading.
Audit Committee (Principle 11)
The Audit Committee (AC) comprises four directors, all of whom are independent non-executive directors. The AC is chaired by Mr Hale, OBE and its members are Yong Ying-I, Mrs Lee and Mr Chin, who joined the AC on December 1, 2008 and replaced Mr Shanmugam, who resigned from the board on April 25, 2008. The AC held four meetings and achieved an average of 83% attendance in 2008. All members of the AC participated actively at meetings either by attendance or through teleconferencing.
In October 2008, the Audit Committee Guidance Committee, an industry-led committee established by the Monetary Authority of Singapore, the Accounting and Corporate Regulatory Authority and the Singapore Exchange, published a Guidebook for Audit Committees. The Guidebook has been issued to all AC members for their reference.
The AC assists the board in fulfilling its fiduciary responsibilities relating to corporate accounting, auditing and reporting practices of the Group. Its main responsibilities are to review the company’s policies and control procedures with the external auditors, internal auditors and management and act in the interest of the shareholders in respect of interested person transactions as well as any matters or issues that affect the performance of the Group. The AC reviews the quarterly, half-yearly and annual result announcements as well as the financial statements of the Group and company before they are submitted to the board for approval.
Each year, the AC also reviews and recommends the appointment of the company’s external auditors. The AC meets the external and internal auditors at least once a year without the presence of management.
The AC has the authority to investigate any matter within its terms of reference. It has full access to management and received its co-operation during the course of the year.
Having reviewed the nature and extent of non-audit services provided by the external auditors to the Group for the year – excluding services provided to Sembcorp Marine, a listed subsidiary that has its own audit committee – the AC is satisfied that the provision of non-audit services by the external auditors did not impair their independence as external auditors. Details of the non-audit fees payable to the external auditors are found in Note 34(b) in the Notes to the Financial Statements.
The AC also oversees the Group’s whistle-blowing policy. For more information on the whistle-blowing policy, please refer to the Risk Management & Mitigation Strategies and Human Resources & Employee Welfare sections of this annual report.
Internal control and risk management (Principle 12)
The board and management of the company are fully committed to a robust system of internal controls and risk management to safeguard shareholders’ interests and the Group’s assets, and to manage risks.
The Risk Committee (RC) is chaired by Mr Hale, OBE and its members includes independent directors, Mrs Lee, Ms Yong and until his resignation, Mr Shanmugam. The main role and function of the RC is to assist the board in fulfilling its oversight responsibility for risk management in the Group. In 2008, besides reviewing the impact and potential risks arising from the on-going global banking and credit crisis on the Group’s operations, the RC also guided and reviewed the proposed mitigating actions with management to ensure preservation of capital and adequate liquidity for the Group’s operations. The impact of the credit crisis on the key customers and suppliers are also being monitored by management. RC also reviewed the adequacy and effectiveness of the risk management plans, systems, processes and procedures of the Group; the Group-wide risk policies, guidelines and limits and the risk portfolio and risk levels including the treatment of identified risks.
The RC held three meetings in 2008 and achieved an average of 81% attendance.
For more information on the progress of the company’s enterprise risk management system, please refer to the Risk Management & Mitigation Strategies section of this annual report.
Independent internal audit function (Principle 13)
The internal audit function of the Group is provided by the Group Internal Audit department (GIA), which reports directly to the AC Chairman on audit matters and to the Group President & CEO on administrative matters.
GIA adopts a risk-based methodology in defining
its annual internal audit plan, which is reviewed and approved by the AC. The internal audits performed are aimed at assisting the board and management in the discharge of their corporate governance responsibilities as well as improving and promoting effective and efficient business processes within the Group. To ensure that the internal audits are performed by competent professionals, GIA employs qualified staff and identifies and provides training and development opportunities for them so that their technical knowledge remains current and relevant. GIA is guided by the standards for the professional practice of internal auditing developed by the Institute of Internal Audit and has incorporated these standards into its audit practices.
The board has been kept informed of the AC’s review of GIA’s reports and the management controls in place and is satisfied on the adequacy of the internal controls in the Group.
To strengthen corporate governance practices across the Group, the company has put in place a whistle-blowing policy and procedures which provide employees with accessible channels to GIA for reporting suspected fraud, corruption, dishonest practices or other similar matters. The aim of this policy is to encourage the reporting of such matters in good faith, with the confidence that employees making such reports will, to the extent possible, be protected from reprisal.
Regular, effective and equal treatment of shareholders (Principle 14)
Sembcorp continues to keep all stakeholders informed of its corporate activities on a timely and consistent basis. The company disseminates all price-sensitive information to its shareholders via SGXNET on a non-selective basis. Financial and other performance data is given for the Group as well as business units where appropriate, to give shareholders a better insight into the Group’s performance. The date of the release of quarterly results is disclosed two weeks prior to the date of announcement through SGXNET. On the day of announcement, the financial statements as well as the accompanying press release and presentation slides are released onto the SGX-ST website as well as on the company website at www.sembcorp.com. Thereafter, a briefing or teleconference by management is jointly held for media and analysts. For first half and full year results announcements, results briefings are concurrently broadcast live via webcast.
Following the release of financial statements or price-sensitive developments, investor relations officers are available by e-mail or telephone to answer questions from shareholders and the media as long as the information requested does not conflict with the SGX-ST’s rules of fair disclosure.
Greater shareholder participation at General Meetings (Principle 15)
The company encourages shareholder participation at General Meetings. Information on shareholder meetings is disseminated through notices released via SGXNET and published in local newspapers, as well as through reports or circulars sent to all shareholders. All registered shareholders are invited to participate in shareholder meetings. The company’s Articles of Association allow all shareholders the right to appoint up to two proxies to attend and vote on their behalf. The company also allows CPF investors to attend General Meetings as observers.
Voting in absentia by mail, facsimile or e-mail is currently not allowed as such voting methods would need to be cautiously evaluated for feasibility to ensure that there is no compromise to the integrity of the information and the authentication of the shareholders’ identity.
At General Meetings, every matter requiring approval is proposed as a separate resolution. Shareholders present are given an opportunity to clarify or direct questions on issues pertaining to the proposed resolutions before the resolutions are voted on. The board and management are present to address these questions and obtain feedback from shareholders. The external auditors are also present to assist the board. Minutes of shareholder meetings are available on request for registered shareholders.
For further details on Sembcorp Industries’ communications with its shareholders, please see the Investor Relations chapter of this annual report.
The company has adopted a Code of Compliance on Dealing in Securities, which prohibits dealings in the company’s securities by its directors and senior management for two weeks prior to the announcement of the company’s quarterly results. Directors and employees are also expected to observe insider trading laws at all times even when dealing in the company’s securities within the permitted trading period.
Shareholders have adopted an Interested Person Transaction (IPT) Mandate in respect of interested person transactions of the company. The IPT Mandate defines the levels and procedures to obtain approval for such transactions. Information regarding the IPT Mandate is available on the company’s website, www.sembcorp.com. All SBUs are required to be familiar with the IPT Mandate and report any such transaction to the company. The Group Reporting and Policies Department maintains a register of the company’s interested person transactions in accordance with the reporting requirements stipulated by Chapter 9 of the SGX-ST Listing Manual. Information on interested person transactions for 2008 may be found in the related item under the Supplementary Information section of the financial statements in this report.