Singapore Slings Arrows at Bank State Investment Company Presses U.K.'s Standard Chartered for Additional Independent Directors
Oct 3 2012
By P.R. VENKAT And DAVID ENRICH
SINGAPORE—Temasek Holdings Pte. Ltd., the Singapore state investment company that is the biggest shareholder of Standard Chartered STAN.LN -0.23% PLC, has been expressing its discomfort with the bank's governance and is pressuring it to appoint more independent directors, people familiar with the investment company said.
Temasek, which owns an 18% stake in Standard Chartered, doesn't have any immediate plans to sell its shares in the bank, people familiar with the investment company said. To register its unhappiness with the bank, it abstained from voting for the re-election of the nonexecutive directors to the board in May, one of the people said
Standard Chartered is based in London but does most of its business in emerging markets and has a significant operation in Singapore, including the headquarters of its private bank. It is one of the few banks that continued to expand through the financial crisis, and it has stepped up lending in Asia as other banks have pulled back.
But the bank was blindsided over the summer by accusations from a New York regulator that it violated U.S. trade sanctions by hiding more than $250 billion of transactions with Iranian customers. Its shares plunged 20% on the news but have since recovered. The bank reached a $340 million settlement last month and remains under investigation by other U.S. regulators in the case.
The Singaporean investment company first bought shares in Standard Chartered in March 2006, and investment bankers have been approaching it for years trying to arrange a deal to sell the stake. Temasek would seek a premium to the current share price for its stake in the bank, people familiar with the Singapore company's thinking say, adding that Temasek is still a "very long way off" from "a willing buyer, willing seller" situation.
A person close to Standard Chartered said the dispute stems from Temasek's desire for the bank to have a supervisory board consisting of just one Standard Chartered executive, with the rest of the board made up of independent directors. Standard Chartered views this arrangement as incompatible with British governance rules, this person said. "It's a difference of opinion that's long been there," the person said.
Standard Chartered has been considered an attractive takeover candidate because of its presence in fast-growing markets and its strong balance sheet. But the bank's relatively high valuation has made that less likely.
Even acquiring a large stake, such as Temasek's 18% position valued at $9.7 billion, could be difficult for another bank to pull off. A new set of rules governing bank balance sheets, known as the Basel III accord, requires banks to stockpile large quantities of capital if they hold minority ownership stakes in other financial institutions. The rules, which take effect gradually over coming years, already have prompted many large banks to ditch minority stakes in other institutions. Bankers and analysts say they are a powerful deterrent against acquiring additional stakes.
Standard Chartered last week announced that it will appoint four new independent, nonexecutive directors, but a person familiar with Temasek's thinking said the company hopes the bank will move further. Two of the independent directors will join the board in November and the other two will join in January.
A Standard Chartered spokesman said last week's board changes were part of a long-awaited "succession exercise" that has been in the works for more than a year and didn't stem from shareholder pressure.
Before last week's announcement, 10 of the bank's 16 board members were independent, and it is unclear whether the ratio will change with the new appointments. The bank said last week that the "overall size of the board will remain broadly in line with current levels" but added that additional board changes will be announced by the bank's 2013 annual meeting in May.
One of the people familiar with Temasek said the investment company would like to see fewer executive directors at Standard Chartered.
The number of executive directors at the bank has climbed from four to six since 2007, while the number of independent directors has stayed the same. While Temasek abstained from voting for re-election of the bank's independent directors in May, it did vote to re-elect Chief Executive Peter Sands, according to people familiar with the situation.
As a matter of policy, Temasek doesn't hold board seats in the companies in which it invests. But it is placing a new emphasis on governance. In its latest annual report released in July, Temasek added a section about governance: "To provide effective oversight of management on behalf of all shareholders, we advocate that boards be independent of management. We do not support excessive numbers of executive members on company boards."
Temasek doesn't specify what it is seeking in the makeup of a company board, but two of its biggest holdings have a higher ratio of independent directors than Standard Chartered. Singapore bank DBS Group Holdings Ltd., D05.SG +0.27% in which Temasek holds a 30% stake, has seven independent directors including the chairman on its nine-member board, while Singapore Telecommunications, Z74.SG +0.30% or SingTel, which is about 52% owned by Temasek, has seven independent directors on its 10-member board.
Another big U.K.-based bank, HSBC Holdings HSBA.LN -0.28% PLC, in which Temasek doesn't hold a stake, has a 16-member board of which 13 are nonexecutive, independent directors.