CAI JIN

SGX knuckles down over corporate governance code

It's time listed firms realise it is in their own interest to comply, and not just pay lip service

Most shareholders - especially the smaller ones - have little say over how a listed company is run.

Yet, they bear all the risks if they invest in the listed company. They pour money in, hoping the firm's ability to grow its profits will lead to a rising share price and a better dividend payout that would, in turn, help them grow their nest egg.

To mitigate the risks for investors, myriad rules have been introduced over the years to safeguard their interests.

One of the most important is the Code of Corporate Governance, brought in 14 years ago. It provides a set of guidelines on how listed companies should be directed and controlled, touching on sensitive issues such as the composition of a listed company's board and the disclosure of directors' pay.

Adherence to the code is voluntary but - and this is the catch - firms that do not comply have to give reasons in their annual reports.

Yet, the chief regulatory officer of the Singapore Exchange (SGX), Mr Tan Boon Gin, has said he was surprised "at the number of times the corporate governance code was referred to as optional or best practice". And he stressed that a company's failure to comply - or failure to explain non-compliance - with the corporate governance code is a breach of SGX rules, which he plans to deal with using new enforcement powers given to the exchange that include levying fines and denying a listed company access to the securities market.

He also announced the appointment of audit firm KPMG to review listed companies' compliance with the "comply or explain" requirement of the code - and work with those that fall short on a one-to-one basis to improve compliance.

To this columnist and many other people, this would represent a noble effort by the SGX to try and raise overall corporate governance standards of listed firms.

If this succeeds, it would go a long way towards restoring the trust of the investing public whose confidence has been shaken by a spate of incidents on the local bourse in recent years.

These would include the still- unresolved and inexplicable crash of three counters - Asiasons, Blumont and LionGold - which lost $8 billion in market value in a matter of days two years ago, and the more recent attacks launched by short-sellers on Noble Group, a component stock of the benchmark Straits Times Index.

Getting listed firms to pay more than just lip service to adhering to the code has always been an uphill struggle even though, as Mr Tan argues, it should be in their own interest to do so, since in the long term, a well-governed company should translate into better valuations and higher share prices.

Just how difficult was highlighted by this columnist six years ago in an article about a joint survey conducted by the SGX and the Singapore Institute of Directors.

It showed that the ethos which the SGX championed - a greater role for independent directors and better communication with shareholders - was getting the thumbs up from listed firms.

But the irony was that the survey drew responses from only a small fraction - 19 per cent to be precise - of all the firms then listed on the SGX. Most of the respondents were large mainboard-listed firms.

Especially disconcerting because of their near-total lack of response were the SGX-listed firms incorporated in foreign jurisdictions such as Bermuda and the Cayman Islands, even though they were promised full confidentiality on their feedback.

What is more, the spotlight on Noble Group, as it fends off attacks by short-sellers over its accounting practices, has also triggered a debate over its corporate governance practices as issues such as the long tenure of some of its independent directors and its remuneration policies were raised.

Noble is based in Hong Kong, incorporated in Bermuda and listed here. It is a leader in its sector, managing a global supply chain of agricultural, industrial and energy products, with offices worldwide.

In an ideal situation, it would be the type of candidate which the SGX would be eyeing in its quest to attract more foreign companies to wade ashore to list here.

But investors cannot be blamed for asking if foreign companies, which hold the bulk of their assets outside the Republic, would play by Singapore rules.

Thus, it becomes a chicken-and- egg situation for the SGX. In order to be an attractive listing venue, it must also assure these companies - spoilt for choice when it comes to listing destinations - that there would be a healthy appetite for their shares here.

But in order to persuade investors that these companies make good investments, the SGX must make them feel confident that the listing framework and safeguards are sufficient to protect their interests should things sour.

Having set the ball rolling, Mr Tan should not stop there.

Mr Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), once observed that the Code of Corporate Governance was written with an eye to giving companies the flexibility to deviate from its guidelines if needed.

But the problem was that companies were uninformative in their disclosures on deviations from the code. Companies should provide meaningful explanations and not opt for "template" disclosures that shed no light or, worse, obfuscate the issue, he said.

This columnist agrees. Companies should adhere to the spirit of the code, and not just follow it to the letter, simply to keep astride of the SGX's listing rules. In the spirit of more transparency, listed firms should not simply provide boiler-plate reasons for any non-adherence to the corporate governance code.

Mr Tan said one big reason for his move to the SGX from the Commercial Affairs Department (CAD), where he was on the front line fighting white-collar crime, was that he wanted to stop big securities fraud cases from even reaching the MAS or CAD.

As he aptly noted, the most effective way of tackling these cases is through prevention or containment, and the SGX has the ability to stop these cases from moving upstream if it makes timely intervention.

Mr Tan certainly has his work cut out for him.

A version of this article appeared in the print edition of The Straits Times on October 19, 2015, with the headline 'SGX knuckles down over corporate governance code CaiJin'. Print Edition | Subscribe