Background
Being a small sized nation and also one lacking too much of natural resources, it was mandatory for Singapore to adopt a policy of open trade. The overall trade in Singapore currently amounts to thrice its GDP. Moreover, Singapore possesses absolutely no exchange controls either on the inflows or the outflows of foreign currency funds through its residents and non-residents. Despite the presence of stricter controls over the flows of domestic currency, there is no control that the nation has on its inflow and outflow. The country is known to be following an extremely liberal foreign direct investment (FDI) policy, with almost no restriction upon foreign ownership, leaving alone the onshore banking as well as the media industry. On several dimensions, the policies of ownership in several crucial sectors of the economy are extremely liberal in nature, when compared to several other comparable nations. For instance, there are several constraints in terms of ownerships in the sectors like airlines as well as financial institutions in places like Canada and the United States of America.
Given the prevalence of such environments, it is but obvious that corporate governance and regulations in Singapore would also be set in parallel to such developed nations mentioned above. After the Asian economic crisis that shook several global markets, corporate governance, both in practice as well as philosophy, has developed at a dramatically high pace to match the standards disseminated by OECD (Organization for Economic Cooperation and Development) in the year 2000. Nevertheless, in relation to the increased pace change with respect guidelines and implementation in the United States, Singapore is yet to emerge a lot.
There are 5 specific areas in Singapore’s corporate governance system that results in this gap. They are namely “ownership structure, disclosure regime, structure of the board of directors, use of share option schemes, and government corporate ownership.” Typically, the high degree of ownership concentration in collaboration with poor disclosure and highly vague framework in the coup market are highly favorable for owner-managers so that hey exploit the weaker minority shareholders and their bargaining power.
The power of institutional monitoring rests with the Monetary Authority of Singapore or the Singapore central bank, with respect to financial institutions. Singapore however, is not benefiting in any manner despite “the strong bank-centered monitoring exemplified by Germany or the multi-pronged and activist monitoring by the SEC, New York State Attorney General, Congress, pension funds and other NGOs in the U.S.”
In view of the consequences that the 2008 financial crisis had as well also in view of the recent corporate incidents that brought to light noteworthy inadequacies in corporate governance, global business situations continue to pose more and more challenges, several global nations are still watching a wave of regulatory changes sweep through, and also the demands of the shareholder with relevance to sustained growth continues to stay high.
In this rapidly and continually progressing business and regulatory backdrop, retaining a fool-proof corporate governance that is founded on high degree of standards becomes crucial if companies need to continue being competitive while also being sustainable. Such high standard of corporate governance setting is not only important for companies alone, but is also equally crucial for economic growth and development. Several of Asian economies are continuously adapting and enhancing their corporate governance structures in this background, and Singapore is in no way an exception to this fact. A comprehensive and open regulatory structure becomes highly crucial for Singapore in order for it to safeguard its reputation as one of the world’s principal and reliable financial hub.
With this initial background information having been presented above, the current research focuses on demonstrating an applied and theoretical understanding of corporate governance and regulation as applicable to the Singapore Stock Exchange (SGX) and its recent initiatives to review the degree of compliance of the ‘locally-listed’ companies to the ‘comply or explain,’ one of the most important guideline of the Singapore CG Code (Code of Corporate Governance).
The Corporate Governance Regime of Singapore
It has been close to twenty years since the time the Corporate Finance Committee gesticulated the shift in the capital markets regulation philosophy in Singapore in the year 1998. The Corporate Finance committee proposed to modify the existing philosophy that was purely merit-based into a majorly disclosure-based system. Currently, Singapore has evolved into being one of the most deep-rooted and stable capital markets in the Asia-Pacific region. In the year 2014, the Asian Corporate Governance Association conducted a corporate governance ranking, in which Singapore ranked first in whole of Asia. A similar ranking in the year 2015 given out by World Bank Group rated Singapore as being the first among 189 global economies with respect to the ease of conducting business, and also in safeguarding minority investors.
The regulatory regime that is currently in place in Singapore essentially adopts a two-pronged methodology, whose focus is predominantly upon two aspects namely, disclosure and controls. This can be further elaborated that the disclosure-based framework for securities regulation is embedded at its core, despite the indistinctness of the various controls might seemingly increase and also plummet occasionally.
Disclosure-based Regime
A disclosure-based regime is something that is completely dissimilar from that of a merit-based system or method. The later relies heavily upon the securities regulators for judging if transactions should be allowed to progress further based on their perceived assets or intrinsic worth, and whether to filter issues even before they emerge into critical issues.
According to one argument, the quintessence of the disclosure philosophy is nothing but a strong belief that the market is well-positioned than the securities regulators for assessing the merits and demerits of the financial transactions. The massive group of investors, which also includes analysts who are essentially industry or sector specialists, are the best judges who can assess their merits and demerits on their own. Based on this particular argument, the hypothesis that can be comfortably arrived at is that markets are innately efficient and the market as a united lot tends to make sure that the stock prices are reflecting the appropriate values of any and all information, once the same has been disclosed.
Another argument is that, a disclosure-based system does not presume that investors are flawless in their decisions. ‘To err is, to human,’ and this statement is aptly applicable in this argument because as human beings, we naturally tend to suffer from cognitive restrictions like predispositions and heuristics. Instead, the stance made in the current argument is that it is better that a few decisions are left to the wish of the market, rather than being too dependent on regulators. Based on this particular argument, is the hypothesis that even regulators being human beings tend to have their own limitation and thus cannot lay their hands on everything that not so good, and cannot be imprecisely suspicious prior to entering the market. Nor is it right on the part of investors in expecting the regulators to be so perfect and precise in their predictions about the market.
In a disclosure-based method of governance, mandatory disclosure is essential for several reasons. In order to make robust investment decisions, it is important that investors are equipped with the required information, and such information must be made available to all the investors at the same time, and should be disclosed on a selective basis. This is important and very much essential for the creation of a fair market that would sustain and uphold the confidence of the investors.
Essentially, mandatory disclosure alleviates immoral conduct by eradicating the erroneous hope that actions might not get recognized at no point of time. Even though business failure or unlawful activity might take place among any of the listed companies in any of the global markets, high standards in terms of disclosure give way to speedier detection and swift attention to the issues that might arise. According to Louis Brandeis, “Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”
Regulatory Controls
The next important thing to focus upon is the degree of regulatory control and controls upon the corporate governance. Corporate governance denotes the processes and structures that are in place and that directs and manages the affairs of a business entity. Controls related to corporate governance, or alternatively referred to as governance controls, essentially denote the measures that are taken to delimit and allocate the powers of decision making among the various players of the entity, with respect to corporate governance and other related affairs.
Financial crises precipitate the frequencies of corrupt and immoral practices of corporate governance. They can also be considered as the clarion calls that highlight the need for improvements. Regulatory reforms in Singapore have always focus upon ensuring audit committees as well as internal controls that are highly effective and robust.
The primary aim of regulation is to uphold the confidence by ensuring the presence of a rational, systematic and transparent market while also minimizing the amount of systemic risks, which ultimately are a serious threat to market stability. Regulation is however associate with some degree of externalities. In the process of putting in place standards and prospects, sound guidelines upholds the trust in the market. However, the same if goes beyond a point, tends to become a form of pervasive regulation that curtails innovation while also reducing the degree of choice as such regulation would demand high costs of compliance.The Singapore Exchange (SGX) is known to have recently carried out a review of how the locally-listed organizations are complying by the "comply or explain" requirement as mandated by the Singapore Code of Corporate Governance (CG Code). The entire review was spanned for a duration of four months, during which annual reports of more than 550 companies listed on SGX’s mainboard would be audited. KPMG has been hired as the official audit partner for this drive.
According to the SGX’s chief regulatory office Mr. Tan Boon Gin, the approach adopted by a company towards the Code of Corporate Governance principles essentially expresses the company’s commitment to transparent business practices as well as its accountability to the stakeholders. The ‘comply or explain’ rule that the SGX introduced recently, predominantly a new required laid out based on which companies listed on the exchange will have to carry out an annual review of their sustainability, like for example, social issues or environmental issues.
All the companies that are listed on the exchange will have to either report or explain their decision – whether or not they would like to be part of such an initiate within five months of the closure of the financial year, while a grace period of 12 months would be offered to the publishing of their first annual sustainability report. Other aspects that fall under the purview of the CG Code include composition of the board, risk management strategies and “internal controls and disclosure on remuneration.”
A company will define and decide which environmental, social and governance (ESG) issues are pertinent enough to its business and the same are to be addressed in the annual sustainability report. Such a report would further ensure that the company's policies and performance that are relevant get listed. The company is also expected to offer a rough draft of its various sustainability targets for the forthcoming financial year. This annual report that is being mandated by SGX is aimed at capturing the wide range of elements constituting the CG Code while also focusing upon specific areas as detailed in the Disclosure Guidance document of the SGX.
There had been an overwhelming support that this ‘comply or explain’ requirement put forth by the SGX as this endeavor call for increased degree of transparency, which further stresses upon the management quality. Such strong recommendation for increased transparency because it is the quality of the company’s management that would earn investor support to the company in the long run.
Today, in the aftermath of several financial crises that had sent out tremors to the whole world, investors are not just interested in the returns on their investment, but are also equally worried about the way such returns are generated. Principles of Responsible Investment (PRI), a network which the United Nations supports essentially covers about "US$60 trillion (S$80.6 trillion) in assets under management.” Creation and broadcast of these kind of reports which clarify the transparency and quality of a company’s business affairs, ultimately enables the companies to open themselves into much larger and broader markets where there are innumerable opportunities for growth.
Conclusion
With this new requirement laid out by the SGX, all the listed companies on the exchange are under increased inspection. The companies that have good governance measures would surely amass loads of reserves in terms of trust and confidence of their shareholders, and those who do not meet the criteria laid out would end up losing such trust and confidence.
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