Corporate Governance Reform In Singapore - The SGX Expereience: Checks And Balances - Speech By Ms Yeo Lian Sim, SGX EVP & Head Of Risk Management & Regulation At World Bank Annual Meetings On 17 September 2006.

The World Bank has just rated Singapore among the top 10 countries in the world for good governance. This should not surprise anyone who knows us or does business here. We have been ranked in the top echelon of corporate governance over the years. Good governance is having a good system. Let me tell you about our system of governance in the sector involving listed public companies.

Like clean water, good corporate governance is a hygiene factor – highly important, but taken for granted. It just doesn't stand out. What stands out are the governance failures. We've had our fair share of failures among 700 listed companies in Singapore. Some have been quite spectacular. China Aviation Oil Ltd ("CAO") and Accord Customer Care Services ("ACCS") occurred in the last 2 years. I'll discuss these failures and some of the lessons we learned – which are perhaps more important than encountering failures.

You will notice that what distinguishes the Singapore market isn't just the strong foundation of laws and rules, or the sound institutional infrastructure of regulators, government, brokers and professional bodies. It is how every component in the system comes together and enables the overall system to function effectively. From my point of view, the key ingredients are:
§ an Environment conducive to good governance; and
§ Enforcement which is swift and fair.

A lesson we learned from the past prompted SGX to institute a rule that empowers us to require a listed company to appoint a special auditor – to investigate particular circumstances, to report to the Exchange and to disclose to the investing public. Reporting to the Exchange allows the Exchange, rather than the company, to control proper disclosure. This rule enabled SGX to get to the heart of problems quickly and to ensure disclosure in the case of CAO. By the time ACCS came along, the company's own independent committee appointed the special auditor without prompting from the Exchange.

After the governance failures in 2005, our annual review of listing rules focused on enhancing corporate governance. For one thing, the minimum number of resident independent directors for foreign firms was raised from one to two, so as to encourage active participation in the affairs of the listed companies. A negative assurance for interim results, not amounting to a Sarbanes-Oxley equivalent, was introduced. And with a few other changes, the market has emerged stronger in governance terms.

We have a well-established Corporate Governance Code, promulgated by the Government with the advice of a private sector standing committee. SGX's rules require listed companies to comply or explain. The Exchange performs a surveillance role to foster high standards of disclosure. Equally important, enforcement is swift and fair. There is zero tolerance for cover-up.

In the case of CAO, the company had been successful in procuring jet fuel for sale to airlines in China. This successful jet fuel trading company turned to speculative trading … and its positions turned sour. The company covered up losses using complex derivatives. Losses ballooned, bringing down the company. On 1 December 2004, share trading was suspended.

What of governance?

A comprehensive risk management procedure and framework, declared in the Annual Report, was not practised. Risk Management reported to the CEO, as did Internal Audit, rather than directly to the Board. The option valuation system was inadequate. There was no "mark-to-market" system. Losses were not properly reported to either the Audit Committee or Board. A failure of governance at all levels was the finding of the special auditor. Board members of CAO were mostly executives of the holding company. When disaster struck, they tried to fund losses rather than disclose to the investing public.

In contrast, CAO's post-discovery, crisis handling was exemplary. Cooperation between the specially constituted task force and the parent company led to recapitalization and introduction of reputable strategic investors, one of whom has involvement in running the company. The company settled with creditors and shareholders in record time. The revamped CAO has an independent Chairman and two other independent directors on the Board. On the enforcement side, MAS, CAD and SGX took prompt action. Court proceedings were completed and share trading resumed 16 months after suspension.

The turnaround of CAO from poor governance to good was as much fostered by the environment and system as by individuals and the company. Enforcement was efficient, prompt and fair. This episode demonstrates that while we do not tolerate wrongdoing, we will support and encourage the best of corporate governance.

The same applies to another example. ACCS provides handphone repair and distribution services. In February 2005, the company revealed that Nokia had terminated its contracts. The Board became aware of possible irregularities in the Company's operations, when the police started investigations. The Board formed an independent committee of investigation and appointed a special auditor. While the Nokia contract was not material, an unrelated and fictitious business unit for the refurbishing of handphones was discovered. This had overstated revenue – FY2004 profit was wiped out. Staff unconnected with the problem took over the running of the company, while affected directors and management resigned. The executives involved were prosecuted. So far (it's been 18 months) the CEO, CFO and 5 executives have been sentenced. The company itself has concentrated on rebuilding its business and still trades, under a new name mDR Ltd, on the Exchange.

Good corporate governance does not depend on just rules and regulations or on institutions and infrastructure. These are necessary but not sufficient conditions. Human beings play the major role and human integrity is critical.

Integrity is one of the important characteristics tested in the listing process. SGX has the power to require investigative reports on issuer integrity as part of the IPO process. There was initially some reluctance. Nowadays, IPO professionals are commissioning private investigations, rather than waiting for the Exchange to require it. These listing professionals are our partners in screening companies they sponsor for listing. We review their work regularly – and take disciplinary action as appropriate, including suspension, even though it may affect our business inflow.

Integrity is essential in good governance – not just for the regulated, but also the regulator. The most common charge levelled at SGX is the perceived conflict between commercial and regulatory objectives; namely that SGX's pursuit of commercial gain erodes its regulatory standards. In SGX, we see no conflict at all. For us, the pursuit of regulatory quality builds confidence and grows an enduring marketplace - something in the interest of all SGX's stakeholders.

How do we deal with this perception of inherent conflict?

Regulatory staff are totally separate from commercial business units, even though both report to the CEO and thence to the Board. A Conflicts Committee of the Board ensures that our budget and staffing are adequate, and that our regulatory framework and processes can handle this self-regulatory conflict. SGX's Board reports on conflict handling annually to the MAS. MAS inspects SGX regularly. This structure allows Regulation to have proximity to market, for its benefits; while providing safeguards for regulatory standards.

I hope I've shown you something of how our system works. Our approach to corporate governance is to try to create the kind of environment that encourages and fosters governance best practice. This is work-in-progress and will always be as we adjust to the changing marketplace.