CORPORATE GOVERNANCE STATEMENT
Engg’s principles of corporate governance reflect its heritage and belief in delivering results while building for the future.

The Group firmly believes that integrity, excellence and commitment in its people supported by a sound system of policies, practices and internal controls will help to create long term value and returns for its shareholders.

It believes that integrity and professionalism are the cornerstones of its commitment to build a great company of which shareholders, staff, customers, suppliers and other stakeholders can be justifiably proud. Sound corporate governance is one element of a sound corporation. This is an important requisite for steady growth as a trusted and respected business enterprise.

Corporate Governance Report 2003
As 2003 was the first year of implementation of the Singapore Corporate Governance Code (“Code") where listed companies were required to describe their corporate governance practices with specific reference to the Code, ST Engg’s Annual Report for 2002 carried both a Corporate Governance Statement and a Report of Corporate Governance Activities in 2002.

In May, ST Engg received clarification from SGX that listed companies should instead "focus on how they have applied the principles of the Code, which embody its spirit, rather than the many individual guidelines."

The Group’s approach in 2003 remains unchanged. The Board will continue to update and review its corporate governance processes. This Corporate Governance Report 2003 is structured along the same lines as the Principles of the Code with sections dealing with the 15 Principles.

Principle 1: Board’s Conduct of its Affairs
Principle 2: Board Composition and Balance
Principle 3: Chairman and Chief Executive Officer
The Board comprises 12 Directors and an Alternate Director. The Chairman is Peter Seah, a non executive Director independent of management, and the President and CEO is Tan Pheng Hock. Eleven of our directors are non executive of whom six are independent directors. The Board has determined that six of its directors are independent and do not have a material relationship with ST Engg as defined by the Code. These directors are Koh Beng Seng, Venkatachalam Krishnakumar, Tan Guong Ching, Winston Tan, Lucien Wong and Dr Philip Pillai. The Board has further determined that it is of an appropriate size to meet the objective of bringing a balance of skills and experience to bear on the deliberations of the various board committees that its directors sit on.

During the year, Lieutenant-General Lim Chuan Poh retired at our AGM upon his posting to another ministry and did not stand for re-election. Philip Tan resigned as Director and Chairman of our Audit Committee after having served the ST Engg Board and Audit Committee for six years, with the last two years as Audit Committee Chairman. He had distinguished himself with great diligence and dedication in the discharge of his responsibilities. He was replaced by Koh Beng Seng.

During the year, the Board welcomed Major-General (MG) Ng Yat Chung and Brigadier-General (BG) Bernard Tan Kok Kiang (Alternate Director to MG Ng Yat Chung) in June, Koh Beng Seng as Director and new Audit Committee Chairman in September and Dr Tan Kim Siew in December. They will be retiring and submitting themselves for re-election under Article 104 at the forthcoming AGM. In addition Professor Lui Pao Chuen and Winston Tan will retire and submit themselves for re-election at the forthcoming AGM under Article 98 of the Articles of Association. Tan Guong Ching will also retire but will not seek re-election.

The Board held a total of five Board meetings during the year. Of these, three were regular meetings held to coincide with the approval of the 2002 results, annual budget for 2003 and release of the half year results. Two additional Board meetings were held to specifically consider new investment opportunities and to review the strategic business directions.

The Board is supported by Board committees who have been delegated certain areas of responsibilities. A rationalisation of the Board committees and their functions was undertaken during the year by the Board. It has dissolved some board committees so that business issues are addressed collectively rather than as theme-based discussions and dissolved others which have served their purpose.

The following Board committees have been dissolved:
i) Legal
ii) Share Transfer
iii) Tax Review
iv) Fixed Asset Strategy Management

As and when a need arises during the year to address certain specific areas of focus, the Board will establish special purpose committees.

The matrix of Board members’ participation in the respective Board committees is found in page 67 of this Report. ST Engg believes that this is a more meaningful way to present directors’ contributions than to report on directors’ attendances at board meetings.

Directors and key senior executives of the ST Engg Group are prohibited from dealing in ST Engg shares two weeks before the respective announcements of its first three quarters and full year results up to the date of the announcement of the results. Additionally, all Directors of the ST Engg Group and its employees are required to observe the insider trading laws at all times.

Principle 4: Board Membership
Principle 5: Board Performance
The Nominating Committee is responsible for identifying and selecting new directors. The Nominating Committee comprises Peter Seah as Chairman, Tan Guong Ching, Dr Philip Pillai and Ng Kee Choe as co-opted member. Peter Seah is a non executive director independent of management while Tan Guong Ching and Dr Philip Pillai are independent directors.

The composition of the Nominating Committee is identical to the Executive Resource and Compensation Committee (ERCC) as both committees have the objective of searching for talent and expertise to enrich the Board and to strengthen the management in the Group.

During the year, three Nominating Committee meetings were held to consider nominations and to review the membership of the Board and Board committees in the Group. Informal reviews of the Board’s performance are undertaken with inputs from the other Board members and the President and CEO.

On appointment, new directors are given a briefing by the President and CEO of ST Engg on the strategies of the Group. From time to time, seminars on updates to the relevant laws and corporate governance are run for the benefit of the directors and the management, both internally and by Singapore Technologies.

The Board consists of members with backgrounds in finance, banking, technology, legal and management skills and each brings with him an independent and objective perspective to enable balanced and well considered decisions to be made.

Principle 6:
Access to InformationIn addition to Board and Board committee meetings, the Board receives monthly reports providing updates on key operational activities and financial analysis. The Board has unrestricted access to the President and CEO, the Chief Financial Officer, management and the Company Secretary as well as the internal and external auditors.

Principle 7: Procedures for Developing Remuneration Policies
Principle 8: Level and Mix of Remuneration
Principle 9: Disclosure on Remuneration
The ERCC performs the role of the Remuneration Committee. All the members of the ERCC are independent of management and include a co-opted member who was a past Director of ST Engg. The ERCC has access to professional advice from appropriate external advisers as and when it deems necessary. The ERCC may meet with these external advisers without management being present. All decisions at any meeting of the ERCC shall be decided by a majority of votes of the ERCC members present and voting (the decision of the ERCC shall at all times exclude the vote, approval or recommendation of any member who has a conflict of interest in the subject matter under consideration).

The ERCC has been authorised by the Board to carry out, among other things, the following duties and responsibilities:

• Consider, review and approve and/or vary (if necessary) the entire specific remuneration package and service contract terms for each senior management executive (including salaries, allowances, bonuses, payments, options, benefits in kind, retirement rights, severance packages and service contracts) having regard to the executive remuneration policy for ST Engg.
  
  
• Consider and approve termination payments, retirement payments, gratuities, ex gratia payments, severance payments and other similar payments to senior management executives.

The ERCC met four times in 2003. The key activities centred on the assessment and development of the management team, target setting, and the determination of their compensation, incentives plan and award. During the year, the senior management team also went through a 360 degree feedback exercise aimed at enhancing awareness of their managerial competencies as perceived by others and this led to a better understanding of their strengths and development areas. Another major area of discussion was that of succession planning for the key positions in the Group. The Committee also reviewed and approved the grant of share options and conditional performance share awards under ST Engg’s approved share plans.

We have set out a group wide cross section of executives’ remuneration by number of employees from S$100,000 upwards in bands of S$50,000 up to S$250,000 at page 195. This is a comprehensive analysis detailing remuneration for up to 1,000 of our employees which gives a macro perspective of the remuneration pattern in the Group instead of the traditional disclosure of remuneration for a small group of selected individuals.

Principle 10 : Accountability and Audit Accountability
The Board has overall responsibility to shareholders for ensuring that the Group is well managed and guided by its strategic objectives. The Board is supported by nine Board committees each with its respective written terms of reference to address areas of investment and divestment, internal controls, risk review, talent management, budget and research, development and technology.

Principle 11: Audit Committee
The Audit Committee held four meetings during the year. The first three meetings were chaired by Philip Tan before Koh Beng Seng took over the chair at the fourth meeting. Other Audit Committee members are Dr Philip Pillai and Venkatachalam Krishnakumar, who are independent directors.

The Audit Committee reviewed and recommended to the Board the release of the yearend and half yearly financial statements, considered and approved the 2003 Internal Audit Plan, reviewed internal control procedures and Interested Person transactions. Delegated the authority by the Board, the Audit Committee also met and approved the release of the financial results for the first and third quarters of 2003.

During the year, the Audit Committee reviewed and recommended to the Board for approval, the revised Terms of Reference of the Audit Committee updated for compliance with statutory and SGX requirements. The Audit Committee met respectively with the auditors, Ernst & Young, and with the internal auditors without the presence of management.

The Audit Committee reviewed the nature and extent of non audit services provided by the external auditors during the year which included tax services and was satisfied that the services were not so significant as to call into question the external auditors’ independence.

The Audit Committee also reviewed the performance of the external auditors and recommended to the Board the re-appointment of the auditors at the 2003 AGM.

The Audit Committee is supported in its work by the Audit Committees of the four main subsidiaries, which mirror the activities of the ST Engg Audit Committee. At every Audit Committee meeting of ST Engg, the respective Chairmen of the Audit Committees of the four subsidiaries are invited to attend. This is to ensure an effective flowdown to the subsidiaries of discussion and understanding of policies made at the holding level, as well as a channel to flow up views to the Audit Committee of ST Engg.

The Audit Committee has full authority to commission and review findings of internal investigations into matters where there is any suspected fraud or irregularity or failure of internal controls or infringement of any law likely to have a material impact on the Group’s operating results. The Audit Committee is also authorised to investigate any matter within its terms of reference with the full co-operation of management.

Principle 12: Internal Controls
Principle 13: Internal Audit
During the year, management placed emphasis on improving its internal controls framework for monitoring compliance (which include such activities as concentration risks). The Risk Review Committee, which comprises Winston Tan as Chairman, Tan Pheng Hock, MG Ng Yat Chung, Lucien Wong and Venkatachalam Krishnakumar as members and Chang See Hiang as co-opted member, is reviewing the need to strengthen the reporting and monitoring structure at each subsidiary level of the organisation along respective lines of management responsibility.

The framework is there to provide reasonable and not absolute assurance for achieving certain internal control standards. There is considerable judgment to be applied in relation to assessing the likelihood of certain risks arising and prioritising those risks according to their gravity in order to determine what risks may be considered acceptable and what would require more management and Board attention.

The Board of Directors, through the Audit Committee, the President and CEO and the Chief Financial Officer, considers that the Group’s framework of internal controls and procedures is adequate to provide reasonable assurance of integrity, confidentiality and availability of critical information, the effectiveness and efficiency of operations, safeguarding of assets and compliance with rules and regulations; that problems are identified on a timely basis and there is a process in place for follow up actions to be taken promptly to minimise unnecessary lapses. The framework is elaborated on below.

Delegation of Authority for Investments
As part of the internal control process, written policies and procedures have been put in place which set the limits of delegated authority for management and the subsidiary boards. Investment proposals of subsidiaries beyond certain thresholds are first referred to the Business Investment and Divestment Committee for deliberation. Where an investment exceeds the level delegated to the Business Investment and Divestment Committee, the Committee’s recommendations are referred to the Board for decision.

The Committee comprises Tan Guong Ching as Chairman with Tan Pheng Hock, MG Ng Yat Chung, Winston Tan, Quek Poh Huat and Venkatachalam Krishnakumar as members.

During the year, the Business Investment and Divestment Committee met once to consider a potential investment proposal by a subsidiary. The Committee, by way of a circular resolution, also approved the closure of an overseas subsidiary and the divestment of part of the equity stake in a company involved in the development of unmanned technology.

Management Representation on Subsidiaries’ Boards to ensure Continuity of Strategic Process
Key management staff in ST Engg are appointed on the boards of key subsidiaries and joint ventures to ensure the business objectives of these companies are in line with the Group’s strategic thrust and to monitor key financial information.

Legal
During the year, we adopted an ST Group policy which requires the engagement of external legal counsel to supplement the expertise of in house legal resources for material transactions. The objective is to manage and minimise risk exposure in the performance of contracts of certain significant value.

Internal Audit
The internal audit function of the Group is undertaken by the Group Internal Audit (GIA) Department of the immediate parent company, Singapore Technologies.

The GIA attends every Audit Committee meeting of ST Engg and its subsidiaries and reports on its internal audit work at such meetings. Its Internal Audit workplan for the year is reviewed and approved by the Audit Committee. In addition, the Audit Committee oversees and appraises the quality of the audit effort of the Company’s internal audit function.

During the year, GIA introduced the concept of Control Self Assessment (CSA) in ST Engg. CSA is a methodology that helps management to identify and manage risks. It has structured processes which tap into the knowledge and experience of staff to self assess the risks and controls of their business and the systems and processes employed. Two pilot CSA projects were launched in two subsidiaries with the help of external facilitators.

During the year, GIA made audit visits to overseas subsidiaries in accordance with their annual Internal Audit schedule. Post acquisition audit reviews of significant investments were made to ensure the objectives of the acquisitions were met.

Budget and Finance
Budgets prepared by the respective subsidiaries are consolidated at the ST Engg level and presented to the Budget and Finance Committee for review and recommendation to the Board for approval.

During the year, the Budget and Finance Committee held three meetings. Chaired by Tan Guong Ching, the Committee members are Tan Pheng Hock, Lucien Wong and Quek Poh Huat. The Committee reviewed the Budget for 2003 prior to submission to the Board for approval. The Committee also reviewed the first quarter financial statements of the Group, the half year results and the third quarter financial statements as well as the forecast for 2003 against the Budget at every quarter.

Environment and Safety
During the year, environment and safety issues were also on the top of management’s list of priorities. The Group has put in place a procedure which calls for an environmental risk analysis to be undertaken as a due diligence step prior to review of any potential investment. Its standing procedure provides that environmental reports are reviewed or carried out on new potential acquisitions where land assets are being acquired. Such environmental reviews cover field, soil and groundwater analysis. The findings from such a study form part of the investment proposal to the Business Investment and Divestment Committee or the Board.

Management held sessions to review key safety issues in the Group with focus on the guiding principles, standards, programmes and measures as well as sharing best practices within the organisation.

Tax
The Tax Review Committee held a meeting during the year prior to its dissolution to review the major tax issues in the Group. Chaired by Winston Tan with Lucien Wong as member, the Committee discussed, among other things, the need to engage tax consultants to advise on cross border transactions prior to structuring a deal.

Other Board Committees
The Senior HR Committee is chaired by Peter Seah and comprises Tan Pheng Hock, Tan Guong Ching and MG Ng Yat Chung. The Committee convened a meeting during the year to review the training and development needs of senior staff as well as the career development path of staff with potential to hold senior positions in the Group. The Committee also reviewed the succession plan for key positions in the Group.

The R&D and Technology Committee is chaired by Prof Lui Pao Chuen and comprises Tan Pheng Hock and Winston Tan. It met thrice during the year. The Committee was briefed on R&D and Technology projects relating to the building up of centres of excellence to enhance and develop new capabilities to position itself for the changing needs of the defence market. The capability build up and identification of centres of excellence is an ongoing process. The Committee also met to select winning projects for the ST Engg Innovation Award 2003.

The Tenders Committee met once during the year to consider a bid for a shipbuilding contract for an overseas customer. Based on a rolling list of any three directors and the President and CEO, the Meeting was chaired by Tan Guong Ching and attended by Philip Tan and Lucien Wong.

Principle 14: Communication with Shareholders
Principle 15: Greater Shareholder Participation
ST Engg believes in the prompt disclosure of information to its shareholders. The Group has a corporate communications team which organises press and investment analyst briefings on the release of quarterly and yearend results with the management team present to answer questions.

The proceedings are concurrently webcast live to the public to ensure that there is fair disclosure of information. The online webcasting facilities also enable the public and the international investors to access the proceedings and to email their questions online for an immediate response by the management.

During the year, the Company held investor briefings with its major institutional shareholders in Europe, the UK, US and Singapore to ensure that the investing community receives a balanced and complete view of the Group’s performance and highlights of the business.

The Board members attend AGMs and EGMs where shareholders present are given an opportunity to clarify or question the Board on issues pertaining to the resolutions proposed to be passed. The external auditors are also present at the AGM to assist the Directors in answering questions from shareholders. ST Engg supports the Code’s principle to encourage shareholder participation.

The Group also sponsors training courses for investors’ education organised by Securities Investors Association (Singapore) to enable investors to gain better knowledge of reading and interpreting information in annual reports.

Financial and other information are made available on the Group’s website at http://www.stengg.com and this is regularly updated.