1. In a few minutes you will hear from Mr Amar Gill, Secretary General of the Asian Corporate Governance Association (the ACGA), about how Singapore fared against other ASEAN countries in the ACGA’s biannual corporate governance review called the CG Watch.
Corporate governance as means to an end
2. Earlier this year, I had the privilege of speaking at the OECD Asia Capital Market Roundtable together with Amar. My biggest takeaway, and I believe this was from the panel you were speaking on, Amar, was the rationale for corporate governance as described by the OECD which is that corporate governance is a way to improvecompetitiveness and access capital in global markets. In short, corporate governance is not an end in itself. It is a means to an end.
3. Unpacking this rationale further, there are two parts to it.
4. The first part is the competitive element, which applies not just to seekers but also providers of capital. If I recall correctly, the example given at the OECD Roundtable was the latest EU Directive on Multiple Voting Rights adopted this year, which effectively permits dual class shares for publicly traded companies. The link to the objective of facilitating access to capital markets is clear, as is the role of competition from global rivals. For example, the Directive only allows dual class shares for companies raising capital in the EU for the first time, and not for companies that are already public. And it puts EU trading venues on a more equal footing with those in other jurisdictions such as the United States.
5. In the CG Watch, the ACGA asks why we persist with our dual class share framework and our other alternative listing frameworks like Special Purpose Acquisition Companies (SPACs). It is no secret that our biggest new economy companies have chosen to list in the US using a dual class share structure, nor is it a secret that such structures have become increasingly normalised for investors. In the same way as the EU has recognized, we can rail against the tide, or we can have a dual class share regime for such companies to come home or stay home.
6. As for SPACs, they are designed to address the valuation gap that new economy companies may face because investors here are less familiar with such companies and there are no comparable companies already listed here. The SPAC listing process allows investors to spend more time understanding the company, compared to a traditional IPO road show, and together with the presence of a credible sponsor with a good track record in the new economy space, this may help to close the valuation gap.
7. We also hope that the ACGA will recognize that our dual class share and SPAC frameworks do contain safeguards not found elsewhere, such as sunset clauses for dual class shares and skin in the game for SPAC sponsors. So, we have sought to achieve the elimination of a competitive disadvantage judiciously and in the overall interests of market participants.
Corporate governance and access to capital
8. The second part is the link between corporate governance and access to capital and how they should complement each other. I believe this has also not been lost on the ACGA. The CG Watch covers not only the performance of regulators such as MAS, ACRA and SGX, and gatekeepers such as auditors, but also the contribution of the providers of capital, shareholders and investors.
9. The ACGA has recognized the efforts of Japan, the country that finished one place above Singapore in the CG Watch, to “address low valuations of issuers, reduce mountainous cash piles and enhance shareholder value”. For example, the Japanese regulators are requiring their companies to publicly disclose plans to improve capital efficiency, return on equity, and price-to-book ratios, and effectively naming and shaming the companies that fail to do so.
10. This complements the decision of the Japanese Government Pension Investment Fund to raise its domestic stock allocation from 12 to 25% in 2014, resulting in a domestic equity portfolio of 61 trillion yen by the start of 2024. The ACGA has highlighted how the external managers responsible for managing the GPIF funds have also been stepping up their engagements of companies, with the number of engagements doubling between 2017 and 2022.
11. Japanese listed companies have been responding to this greater demand for accountability as responsible stewards of their investors’ capital, and all investors, including retail investors, have benefited.
12. The virtuous circle is completed by how investors have rewarded Japanese companies that made improvements by pouring into the market and propelling their share prices to new highs this year. Companies that disclosed plans to increase their dividends, or initiate share buybacks or streamline their non-performing assets have generally performed twice as well as companies that failed to do so.
Singapore and the “value focus” approach
13. Here in Singapore, we have also embarked on our own “value focused” initiative to enhance shareholder value. This predates, but will hopefully dovetail with, the efforts of MAS’ Equity Market Review Group. We are using a three-pronged approach. The first is to raise the standard of boards, through promoting board renewal and board diversity. Our efforts in this regard, such as capping the tenure of independent directors and mandating a board diversity policy, have been recognized by the ACGA in the CG Watch.
14. The second is to encourage market discipline, by making it easier for shareholders to requisition meetings and by improving the market for corporate control. We tend to think of market discipline in terms of investors punishing a company’s board or a company’s share price when they disagree with what the company is doing. But the upside of market discipline is equally important. Meaning that we must also encourage investors to reward a company when they are happy with what the company is doing.
15. This brings me to the final prong, which is to remove any market friction that gets in the way of value focus activities. We are aware of the feedback from the market that the public trading queries that we issue following an unusual movement in share price can have a chilling effect on the market. This may affect the ability of companies to carry out value focus activities such as share buybacks, or to reap the full benefits of such activities through an increase in their share price. As you must have noticed, the number of trading queries issued has decreased, as we fine-tune our regime to make it more targeted. We have also launched a review of the public query regime itself. I must however emphasise here that the rigour of our trade surveillance remains intact.
16. I will be the first to admit that Japan has taken a much more prescriptive approach and is putting a lot more direct pressure on boards compared to us. As the evidence mounts that the Japanese approach is working, there have been increasing calls for us to take a similar approach. The biggest question, which I want to ask all of you directors here in the room, is whether the Japanese approach will be effective here in Singapore. Would the boards of our listed companies respond positively if we were to implement the Japanese approach? And is this dependent on or regardless of the institutional flow and investor engagement and other tailwinds enjoyed by the Japanese market? Maybe you can ask Amar or Amar can ask you this later during his Q&A.
Conclusion
17. In conclusion, let me go back to the OECD rationale for corporate governance. While we need to carve our own path, the competitive element means we cannot ignore developments elsewhere. Corporate governance and access to capital must complement each other through a virtuous circle. Corporate governance must effectively encourage the capital flows which in turn drive the necessary market discipline to encourage better corporate governance.
18. On that note, let me leave you now in the good hands of Amar, for his take on corporate governance in Singapore.
