Newer trusts on SGX show good governance; issues like directors' independence remain for some

The Singapore Exchange Centre in Shenton Way.
The Singapore Exchange Centre in Shenton Way.PHOTO: ST FILE

SINGAPORE - Newer listings on the Singapore Exchange (SGX) performed credibly on an index assessing how trusts managed governance and business risks, but there are still issues that need to be tackled.

The annual report card released on Thursday (Aug 1) looked at 46 out of 50 real estate investment trusts (Reits) and business trusts on the SGX this year.

Reits and trusts account for over 10 per cent of total market capitalisation of the Singapore stock market.

Concerns flagged in the report - the 2019 Governance Index for Trusts (Gift) - include the way some trusts justify the independence of directors.

"Some independent directors who retire from a trust after serving for nine years promptly joined another related trust as independent director - hypothetically, if there are four related trusts, such directors can still be independent after 36 years!" said Gift's authors, corporate governance professor Mak Yuen Teen and active investor Chew Yi Hong.

"While extensive justifications are given for such cases, we believe these trusts should just cast their net wider when appointing independent directors."

There were also instances where standards regressed.

In one case, a trust stopped allowing unitholders to endorse the appointment of directors. As it deemed that it had complied with the requirement for half of the board to be independent, endorsement was no longer required by the rules.

"This suggests a minimum compliance mindset," said the report.

In another instance, a trust stopped disclosing the remuneration of individual directors, the chief executive and the top five executive officers on a named basis.

It claimed that this would not be in the best interests of the manager, the Reit or its unitholders. This stance was penalised in the ranking.

There were bright spots in the third edition of Gift.

It found that the average combined governance and business risk score has continued to improve, from 62.2 in 2017 to 68.0 this year.

SGX Regulation (SGX RegCo) chief executive Tan Boon Gin said: "Newer trusts performed credibly, testament to the rigour of the listing process in which all market participants play their part."

Singapore Reits now hold more geographically diversified assets as well, with over 80 per cent of Reits and property trusts having properties overseas, he added.

The exchange is also attracting more Reits and trusts holding wholly offshore assets, said Mr Tan, who added that a growing profile of overseas assets offers diversification opportunities to unitholders.

Yet, changing consumer trends mean that new sub-classes of real estate such as co-working and co-living spaces will rise in demand.

Such developments call for the industry to be more proactive in managing risks, he said.

"The industry can expect SGX RegCo to pay close attention to how the management of the trust, board of its manager and its auditors disclose the financials, explain risks and implement internal controls," he said.

"In particular, the use of debt instruments such as perpetual securities will have to be clearly explained, and its impact on cash flow and bottom-line clearly illustrated," he added.


Among those that made the greatest advances was Far East Hospitality Trust, which improved in areas such as the way it appointed independent directors with relevant experience to replace non-executive directors who retired from the board.

It had 83 per cent of independent directors on the board, which was the highest among the trusts.

It was also more prompt in releasing financial results and putting up minutes of its annual general meeting, which help to improve engagement with unitholders, said the report.

The posting of detailed meeting minutes online proved to be the greatest area of improvement in Gift 2019, with 29 out of 46 trusts doing so.

Trusts were found to have reduced their refinancing risks as well. More now have an average debt maturity in excess of three years, and fewer have more than 25 per cent of their debt expiring in 12 months.

More trusts locked in at least 70 per cent of their interest costs as well.

The report said: "From a business risk standpoint, these have provided more stability to the trusts and improved the visibility of cash flows and financing costs."