Good Morning Ladies & Gentlemen,
Corporate Governance - A Holistic Approach
Today, I will like to raise some ideas and topics for you to mull over. These are certainly not pronouncements from the exchange but rather ideas to raise debate and consideration.
Companies are living organisms which have evolved through time - from family-owned shops to private limited companies and then to public-listed enterprises. In each phase, the roles and responsibilities of the principal players transform with the prevailing milieu. The transformation of the family-owned business to a limited company means a separation of the roles of an owner and a manager. In a public company, the expanded field of shareholders means that directors need to consider the interest of the myriad major and minor shareholders. Now, in some jurisdictions, the concept of directors serving only the interests of shareholders, which is entrenched in Anglo-Saxon company law, has expanded to encompass other stakeholder interests. In certain US states, directors are specifically required to consider the interests of non-shareholder constituents. The states of Pennsylvania and Indiana have even expressly allowed for directors to prefer other constituents over shareholders. This illustrates the increasing importance of all stakeholders in the governance ecosystem.
For listed companies, stakeholders include the investing public, shareholders, Board directors, Management and staff, financial intermediaries, regulators and the media. The roles and responsibilities of key players may be crafted legally, but for enduring effect, each player's behaviour must ultimately be shaped by self interest. I define this somewhat ignoble term more precisely as "enlightened self interest". By this I mean that each player works towards its own good, not in a myopic sense, but for the long term.
When each constituent is a watchdog for its own eventual self interest, the concerted effect is good governance in our market. Self interest is prevalent everywhere but the enlightened variant is not as easy to achieve – it is almost an evangelistic endeavour that touches one's belief system. For this reason, the adoption of good governance practices in companies will be a progressive movement involving all players over time.
Comparison of Regulation Amongst Securities Exchanges
Our securities exchange has fared well in comparison with others. The World Economic Forum's Global Competitiveness survey issued in 2005 included a section on regulation in securities exchanges. Among the 104 securities exchanges covered, Singapore ranked 10th with a score of 6 out of a maximum of 7. A perfect score of 7 indicates a market that is "transparent, effective and independent of excessive industry and government influences". The top-scorer is the UK with 6.6, followed by mainly European countries. In this region, only Australia and New Zealand had a higher score than Singapore. The next Asian exchange after us is Hong Kong ranked at 23. It is heartening to know that we are well-regarded, but there is always room for improvement.
SGX's Framework for Corporate Governance
Our Listing Rules relating to corporate governance encompass three major areas. They are "transparency", "robust internal safeguards" and "equitable treatment for potential conflicts of interest".
(i) Transparency
First, transparency. Our continuous disclosure rules require companies to announce any material events or matters as they arise. Minimum disclosure standards are also prescribed for annual reports and financial results which companies are encouraged to exceed. Timely disclosures are aided by technology, through the use of a secure web-based announcement submission and dissemination system called SGXNet. SGXNet announcements are instantly uploaded to the SGX website accessible by everyone.
(ii) Robust Internal Safeguards
Secondly, for internal safeguards, we require deviations from the Code of Corporate Governance to be disclosed in issuers' annual reports, with clear and specific references to the Code.
Some have suggested that the Code of Corporate Governance should really be mandatory and part of the continuing obligations for listed companies. Our Listing Rules set minimum standards which are mandatory. The Code sets out best practice guidelines and principles. All companies should be able to comply with the principles, although they may not be able to comply with every guideline. Our "if not, why not" approach is a practical way of putting responsibility on issuers to actively consider their obligations, without being unnecessarily restrictive. Our requirement that they disclose deviations from the Code in their annual report allows different stakeholders to take issue with the company directly, if they feel that standards are to be improved upon. This is consistent with the overall disclosure-based regime.
(iii) Equitable Treatment for Potential Conflicts of Interest
Third, our Listing Rules on interested person transactions address situations where there may be significant conflicts of interest between shareholders, Management and the company. The rules are targeted at one particular mischief - wealth transfer from the listed companies to interested persons through "uncommercial" transactions. To protect investors from possible erosion of their investments, transactions with interested persons are to be reviewed by the Audit Committee who will check that they are conducted on normal commercial terms and not prejudicial to the interests of the company and its minority shareholders. Also, interested persons are to abstain from voting in certain situations.
When enforcing the Listing Rules, our remedies are essentially, moral suasion, private censure, public censure, suspension or delisting. The problem is that measures such as suspension or delisting will hurt the very people we seek to protect and are of limited use once the breach is made public. Hence, it is of great importance that our requirements are ultimately backed by the law. Without the muscle of MAS which enforces the Securities And Futures Act, ACRA which enforces provisions of the Companies Act and the CAD which investigates fraud and white collar crimes, SGX has a limited role. For example, our continuous disclosure rules are backed by statutes in the SFA. So, a listed company which intentionally or recklessly fails to notify SGX of information as required by the Listing Rules is in danger of having committed a criminal offence. Also, our interested person transaction rules if breached, could lay the directors open to offences under the Companies Act and enforcement by CAD. For these reasons, SGX works closely with the government agencies in the investigation of regulatory breaches.
Effective Governance – Strengthening the Watchdogs
Having set the stage and assembled the cast, how can we then present a world-class performance in good corporate governance? More rules and regulations is not necessarily the answer. Indeed, Singapore is already well-regarded as a country with a commendable legal framework for investor protection. In the World Bank's "Doing Business in 2006" report, which ranks 155 economies on key business regulations and reforms, Singapore ranked second after New Zealand as a country where investors are most protected. The report quoted a lawyer who described practicing law here as "tip-toeing through the tulips". The indicators where we scored among the top three are disclosure of related-party transactions, extent of directors' liability and ease of shareholders' suits.
It is accepted that the regulatory bodies have taken action on regulatory breaches promptly. I would like to address the roles of the other stakeholders who are key to giving effect to the substance and spirit of the regulatory framework. Effective governance requires the workings of enlightened self interest in every player and continual strengthening of their resources.
(i) Board of Directors
I will start with the company's Board of directors. The Board is responsible for balancing the business objectives of the company with prudent governance practices, since a Board would also have failed if a business is risk averse to the point of paralysis.
I would like to highlight the importance of Independent Directors who play a critical role in the companies they serve. In SGX, aspiring issuers are required to have at least two independent directors and appoint directors of good character and integrity. For foreign issuers, we currently require at least one independent resident director. We expect to increase it to two shortly.
To be effective, Independent Directors need to be well-informed, understand the business, and be updated of their obligations. It is the responsibility of Independent Directors to enquire regularly and the Management to respond promptly and fully. Independent Directors should be well briefed on important developments in the company and industry. The importance of the Independent Director's role has been exemplified in cases such as the China Aviation Oil. The PwC report on CAO stated that "CAO's losses were hidden from its directors because they did not fully understand the nature of the speculative options trading …". In contrast, Independent Directors of companies like Auston International were able to uncover irregularities and mis-statements in accounts. Active steps were then taken to commission an investigation by an independent auditor. In the New Lakeside case, the Independent Directors were commended by the press for their vigilance. They took the initiative to call for a special audit of the company's accounts after discovering half-year losses and ambiguity over accounting standards.
It has been questioned whether directors who are on numerous boards can be effective. It is the responsibility of companies and directors individually, to consider whether directors can devote sufficient time and commitment to the listed companies. This becomes especially important when companies face complex or complicated situations which require the immediate and full concentration of its directors. Needless to say, in a crisis, SGX will look to the Independent Directors and expect them to play an active role in sorting out the problems. It might be timely for the Singapore Investment Bankers Association, Singapore Institute of Directors or Council of Corporate Disclosure & Governance to give guidance on the optimal number of Board memberships a director should have. Alternatively, the company's nominating committee could disclose and justify individual director appointments.
Arguably, the greatest value that Independent Directors can add is to ensure that Management does not shirk difficult decisions. For example, our Listing Rules require immediate disclosure of material information. The extent and timeliness of disclosure is something which Independent Directors can help to enforce. An area of particular concern to investors is the issuance of profit warnings which Independent Directors should urge Management to declare where appropriate. If done properly, interim statements from the Board updating shareholders of the company's performance could diminish the need for quarterly reporting. Critics of quarterly reporting could argue that such statements would provide more guidance to investors than a set of numbers. Perhaps this is where you might want to consider and weigh the merits of the possible alternatives.
(ii) Management & Staff
I now move onto the Management and staff of companies. People close to the internal workings of the companies are best able to detect errant behaviour. However, Management and staff have to recognize that in protecting the company, they ultimately protect their livelihood and themselves. Whistleblowing which is motivated by enlightened self interest is unlike malicious or vengeful whistleblowing which can be destructive.
Currently, there are no whistleblower protection laws in Singapore unlike in the US, UK and Australia. However, the Code of Corporate Governance does put the onus upon the company's Audit Committee to review arrangements for staff to raise concerns about possible improprieties confidentially and to ensure that independent investigations and follow up actions will be taken.
At SGX as a company, the Audit Committee and Management have strongly endorsed the whistleblowing framework and we are in the process of implementing it. The framework includes legal support for the whistleblower, non-tolerance for victimization of the whistleblower and emphasis against malicious allegations. In some companies, the whistleblowing policy does not provide explicit legal protection for staff. Without this assurance, staff may be reluctant to raise concerns for fear of adverse repercussions on themselves.
(iii) Shareholders
We now come to the shareholders. Shareholders are a disparate group with different investment objectives and interests, but can be categorized broadly as institutional and retail.
Institutional investors are an important shareholder force. Their financial strength, fiduciary responsibilities, access to research as well as voting power enables them to influence Board and Management behavior. Institutional shareholders should play an active role in engaging the Management and Board in the interest of good corporate governance, at the appropriate forum. In this regard, it is encouraging to know that there has been increasing demand from institutional investors to participate in shareholder meetings. However, many of them hold beneficial interest through nominee companies who are constrained by the limit on proxies to only two. This presents a problem for fundmanagers and institutional shareholders whose custodian bank is the registered shareholder in the company's books. The Singapore Companies Act does not require companies to provide for more than two proxies per registered shareholder. Rather than writing a new rule, we strongly urge listed companies to recognize that it is in their interest to allow for more representation so that more institutions can attend their shareholder meetings and contribute to the quality of discussion. While we expound this, SGX itself as a listed company has not provided for this, but will certainly be looking to do so in the near future.
Retail shareholders are an equally important group for a company to cultivate. SGX's experience as a listed company with retail investors has been favourable over the years. We see progressive improvement in the level of participation and sophistication of the retail investors who attend our shareholder meetings. In August this year, we organized for the first time, an Investors Open Day where all retail shareholders were invited on a Saturday morning to meet SGX's senior management. We shared our strategy for the company and answered the questions fielded which were sensible and thoughtful. We will hold it again next year.
Of course, there will be occasions where a small number of retail investors get over-exuberant. Such behaviour does a disservice to retail investors. I have heard of shareholders who ask for special treatment and gifts. SIAS has issued guidelines for conduct at AGMs, which is a good step. Perhaps SIAS should go further to counsel the few for the good of the majority of responsible retail investors.
(iv) Financial Intermediaries
The next group of players is the financial intermediaries who are charged with the responsibility to advise issuers on compliance with the law and other obligations. Issue managers and professional advisors play a critical role in upholding the standards of disclosure and maintaining the integrity of our market. In The Business Times weekend edition last Saturday, Hong Kong Exchange chief Mr Paul Chow was quoted as saying that Hong Kong was too lenient in its regulatory enforcement of investment banks. I agree with him that investment banks should understand that regulation will ultimately benefit them and that the black sheep should not be protected.
SGX continually monitors the performance of issue managers, identifies areas for improvement and comments on their work. Where we have had general concerns, we raised them with the industry. Issues specific to certain houses are pursued with them individually, as in the recent case of Westcomb.
Issue managers are important at the IPO stage, but can also play a role in providing guidance thereafter, while the issuer gains experience in its post-listing obligations. To this end, SGX will extend the post-listing role of issue managers from the current one year to the first two years of listing. Furthermore, we are revising our rules to allow for investment banks to be appointed as compliance advisors for new and existing listed companies where necessary. In London Stock Exchange's Alternative Investment Market, the issue manager is responsible for the issuer not for one or two years, but for as long as it is listed on the exchange. Known as "nominated advisers" or nomads, they are strictly regulated by LSE and the Financial Services Authority to ensure that they are scrupulous in their dealings and responsible for the integrity of the market. While AIM's regulatory model is substantially different from us, it reflects the thinking that the issue manager is often best placed to ensure that companies embrace good corporate governance practices.
(v) Media
Lastly, the media. You could say they are the loudest whistleblowers. Their prompt questioning is useful in challenging companies to explain themselves.
Putting issues and events in context with perceptive comment and communicating it in a way that is understandable by the investing public is a challenge. It is critical and impacts the long term cultivation of retail investors. The media should continue to play this key role in educating the retail investor.
Conclusion
In conclusion, it is when all stakeholders behave in enlightened self interest, rather than sheer reliance on a set of regulations, that corporate governance among companies will advance.
FTSE Mondo Visione Exchanges Index:
Speech By Hsieh Fu Hua, CEO Of Singapore Exchange Limited (Sgx), At The CAD Corporate Governance Conference On 23 November 2005 Held At The Ritz Carlton Millenia - Corporate Governance – The Role of Watchdogs
Date 23/11/2005