OCBC: A Model For Family Companies And Good Bank Governance?

Case Overview

In December 2010, the Monetary Authority of Singapore (MAS) amended its corporate governance regulations and guidelines for banks and other major financial institutions. These changes were in line with global banking reforms introduced in the aftermath of the global financial crisis. The objective of this case is to allow a discussion of issues such as corporate governance of a family-controlled but professionally-managed company, board structure, board independence and the impact of regulatory changes on OCBC.

Background

Oversea-Chinese Banking Corporation Limited (OCBC) is the longest established Singapore bank, formed in 1932 after the merger of three local banks - the Chinese Commercial Bank (1912), the Ho Hong Bank (1917) and the Oversea- Chinese Bank (1919). OCBC is the second largest financial services group in Southeast Asia by assets and one of Asias leading financial services groups. Globally, it is renowned as one of the top banks in the world; other than being recognised as the Worlds Strongest Bank by Bloomberg Markets Magazine in 2011 and 2012, OCBC is also rated Aa1 by Moodys.1

As a listed company, OCBC has to comply with the Singapore Exchange (SGX) listing rules and comply or explain against the Singapore Code of Corporate Governance, most recently revised in May 2012. As a bank, it has to comply with corporate governance regulations and guidelines issued by the Monetary Authority of Singapore (MAS).

According to OCBC, one of its core values is integrity, which underscores the importance of fair dealing as the basis for doing business. It has won a number of corporate governance and transparency-related awards, including the following: 2

Singapore Corporate Governance Award Big Cap Category (Merit): SIAS Investors Choice Awards 2012

Internal Audit Excellence (Merit): SIAS Investors Choice Awards 2012

Best Managed Board (Market Capitalisation of S$1 billion & above) Gold Award: Singapore Corporate Awards 2012

Most Transparent Company - Finance Category (Runner-up): SIAS Investors Choice Awards 2011

One of the Top 10 companies in Singapore for Best Corporate Governance, Best Investor Relations, Most Committed to a Strong Dividend Policy & Best Corporate Social Responsibility: FinanceAsias 11th Annual Poll of Asias Top Companies

Best Annual Report / Formal Disclosure for 2009 Annual Report: IR Magazine 2010

Singapore Corporate Governance Award (Merit): SIAS Singapore Corporate Governance Award 2010

Most Transparent Company Award - Finance Category (Runner-up): SIAS Singapore Corporate Governance Award 2010

Ownership Structure of OCBC

OCBC Banks founding Lee family is a substantial shareholder of OCBC, holding a total of 20% of the issued ordinary shares. 3.54%of the shares are registered in the name of Lee Foundation. Moreover, the Lee Foundation is deemed to have an interest in 0.66% ordinary shares held by Lee Pineapple Company (Pte) Limited, 11.96% ordinary shares held by Selat (Pte) Limited (of which 0.51% is Selat (Pte) Limiteds deemed interest), 3.68% shares held by Singapore Investments (Pte) Limited and 0.06% ordinary shares held by Peninsula Plantations Sendirian Berhad. The other substantial ordinary shareholders, apart from the Lee Family, are Aberdeen Asset Management PLC with 7.01% of the ordinary shares and Aberdeen Asset Management Asia Limited with 6.19% of the ordinary shares.3

The interest of the Lee family is represented on the 14-member board by Lee Seng Wee and Lee Tih Shih, both of whom are non-executive directors of OCBC. They are not independent from substantial shareholders, but are deemed independent from management and business relationships. They are also affiliated with the Lee Foundation and Selat (Pte) Limited. Lee Seng Wee, the second generation of the Lee Family, was first appointed to the board on February 1966 and was a Chairman of OCBC Bank from 1995 to 2003. He is currently a member of the Boards Executive Committee and Nominating Committee. He is the director with the largest interest in the ordinary shares, with a direct interest of 0.22% and a deemed interest of 0.13%.

Lee Tih Shih, the third generation of the Lee Family, is not as closely involved in the banking business as the previous generations even though he has previously served in senior positions at OCBC Bank. He was first appointed to the board on April 2003 and is presently an Associate Professor at the Duke University Medical School in Durham, USA and Duke-NUS Graduate Medical School in Singapore. He has a direct interest of 0.08% in the bank.4

Board of Directors: Pre-Regulatory Changes

Based on the 2010 Annual Report (AR), OCBCs Board of Directors comprised of 11 board members one executive director (CEO David Conner), 5 non-executive non-independent directors who included the board chairman Cheong Choong Kong, and 5 independent directors, making up more than one-third but less than half of the board. There was one female director, Fang Ai Lian, who was an independent director and had joined the board in November 2008.

The board as a group comprised of members with core competencies in areas such as accounting, finance, business and management. Among the independent directors, Patrick Yeoh Khwai Hoh, who had served the board since July 2001 and Colm Mccarthy, who joined the board in November 2008, have experience in the banking industry. The other independent directors included Bobby Chin, a former managing partner of KPMG Singapore who had served on the board since October 2005 and Neo Boon Siong, a business school professor and former dean who joined the board in January 2005.

The Board had five committees - Audit Committee (AC), Nominating Committee (NC), Remuneration Committee (RC), Risk Management Committee (RMC) and Executive Committee (EC). Except for the EC, the other four committees were all chaired by independent directors. The independent directors constituted a majority in the AC and half of the RC. There were no executive directors in the AC, NC and RC.

Within the AC, only Bobby Chin had recent and relevant accounting experience, while Colm Mccarthy had related financial management expertise. For the NC and RC, the members had accounting or financial expertise. In the RMC, only one member, Lai Teck Poh, a non-executive non-independent director, had risk management experience while the other members had banking, financial or business experience.

Recent Regulatory Changes and Impact on OCBC

In December 2010, the MAS issued the Banking (Corporate Governance) (Amendment) Regulations and revisions to the corporate governance guidelines for banks, financial holding companies and direct insurers incorporated in Singapore. The changes had a major impact on OCBC.5

Director independence

Directors who are independent from management, business relationships and substantial shareholders will no longer be considered independent after they have served for a continuous period of 9 years on the Board. Based on the 2011 AR, Patrick Yeoh, one of OCBCs independent directors, had served on the Board of Directors for 10 years. He retired at the 2012 Annual General Meeting (AGM).

The circumstances under which banks are expected to appoint a Lead Independent Director (LID) were expanded to include situations where the Chairman has other relationships with the Financial Institution (FI).

The Board Chairman and non-executive director, Cheong Choong Kong, is deemed to have other relationships with OCBC because he receives payments and benefits from consulting for OCBC Management Services Private Limited, a wholly-owned subsidiary of OCBC. Therefore, OCBC should appoint a LID. However, OCBC had not done so as of FY2011 and explained that since the CEO and Chairman of OCBC are separate persons and the Chairman is a non-executive director, the appointment of a LID would unnecessarily diffuse the 14-member OCBC board. They also explained that the NC is chaired by an independent director.

Composition of the board and board committees

MAS regulations state that banks shall not appoint a person who is a member of the immediate family of the Chief Executive Officers (CEO) as the Board Chairman. OCBCs Chairman is neither an executive director nor an immediate family member of the CEO.40

At the end of FY2011, OCBCs Board of Directors comprised 14 board members 1 executive director, 5 non-executive non-independent directors including the board chairman, and 8 independent directors, making up more than half of the board. After the departure of Patrick Yeoh, who had served for more than 9 years, the board size was reduced to 13 members, with 7independent directors. Samuel Tsien was appointed Group Chief Executive Officer on 15 April 2012 after the retirement of the former CEO, David Conner. However, Tsien did not join the board as a director. Therefore, OCBC moved to a wholly non-executive board, with a majority of independent directors.

The amended regulations provide that the number of independent directors on the Board, Nominating Committee (NC) and Remuneration Committee (RC) is to be increased from the one-third to a majority.

OCBCs NC comprised of 5 members and is chaired by Fang Ai Lian. At the end of FY2011, there were only two independent directors Fang and Neo Boon Siong in the committee. At the AGM in April 2012, Dato Ooi Sang Kuang, a former Deputy Governor of Bank Negara Malaysia who was appointed as an independent director on 21 February 2012, was elected. He replaced Lai Teck Poh, a non-executive non-independent director in the NC. With this change, OCBC complied with the requirement of a majority of NC members to be independent. The members have experience in accounting, finance, business and academia.

The RC comprised of 4 members and is chaired by Fang Ai Lian. There were two independent directors, Fang and Neo Boon Siong. On 9 January 2012, Quah Wee Ghee was appointed to the RC, and subsequently elected at the AGM. With the appointment of Quah, the RC comprised of 5 members, of whom 3 were independent directors. Hence, OCBC complied with the requirement of a majority of RC members to be independent. The members have experience in accounting, finance, banking, business and academia.

Governance over remuneration framework and practices

The new MAS guidelines recommend additional components and factors that the RC must consider in the design and operation of the remuneration framework. RCs have to ensure that the remuneration practices are aligned with and in accordance with the remuneration framework, strategic objectives and corporate values.

In FY2011, changes were made to the remuneration structure by the RC. This resulted in an increase in proportion of the deferred remuneration component for senior executives. The CEO and his direct subordinates are identified as senior management, while employees with Senior Vice President rank and above are identified as material risk-takers, and these two groups are deemed to have a major influence on the long term performance of the Bank. The remuneration of employees who are reporting directly to the CEO and are of at least Executive Vice President in rank are approved by the board. The remuneration of other employees in the group of senior executives are approved by the remuneration committee.

The MAS guidelines also recommend that the RC should adopt the Principles for Sound Compensation Practices and Implementation Standards issued by Financial Stability Board (FSB) with regards to remuneration matters. These principles cover effective governance of compensation, effective alignment of compensation with prudent risk taking, and effective supervisory oversight and engagement by stakeholders.6

With respect to first principle, staff engaged in financial and risk control should be independent, have appropriate authority, and be compensated in a manner that is independent of the business area they oversee and commensurate with their key role in the firm. It was disclosed in the annual report for FY2011 that the performance of the risk and compliance functions is assessed based on the achievement related to their respective performance measures, independent of the business they oversee. Furthermore, market compensation data on risk and compliance functions are consideredfor remuneration.

With respect to the second principle, compensation outcomes must be symmetric with risk outcomes. It was disclosed in the annual report for FY 2011 that the Banks variable bonus pool is fully discretionary and the factors taken into consideration are the Banks performance, market conditions and competitive market practices. Executives are also remunerated according to their own performance measures, while taking into account market compensation data for their respective job roles.

Governance over risk management

Under MAS regulations, the RMC must comprise at least 3directors and non-executive directors must make up the majority.

OCBCs RMC was formed in August 2004 although it was not mandated by MAS until 2010. During FY 2011, there were 6members in the committee, comprising 2 independent directors, 3 non-executive directors and the CEO. However, after the AGM in April 2012, Lai Teck Poh, a non-executive director, replaced retired independent director Patrick Yeoh as the Chairman, with the other members comprising 2 independent directors and 3 non-executive directors, including David Conner who recently retired as CEO. Only Lai has the relevant expertise in risk disciplines while the other members have technical accounting/finance experience and business experience.

Besides the regulations, the amended guidelines also mention that the Board may appoint a Chief Risk Officer (CRO) to oversee the risk management function depending on the scale, nature and complexity of the business. MAS approval for the appointment of CRO is required. Gilbert Kohnke holds the rank of Executive Vice President and has been the Head of Group Risk Management since September 2005. In his capacity as CRO, he reports to both the CEO and RMC and he does not hold other positions in the bank.

Discussion Questions

1. Comment on the structure of OCBC ownership and control. How does it affect the corporate governance of OCBC?

2. OCBC and UOB both have families as controlling shareholders. How is their corporate governance and management different? What are the pros and cons in the different ways they are governed and managed? Which do you think is the better approach?

3. Evaluate the board structure of OCBC in terms of its size, independence, competencies and diversity.

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4. How have the new MAS regulations and guidelines affected the corporate governance of OCBC, particularly in the areas of board composition, remuneration and risk management? Discuss whether the measures adopted by OCBC are appropriate.