1. Thank you for coming this morning to the SGX Regulatory Symposium. This is an important event for us as it provides an opportunity to hear from our stakeholders during the programme and in our informal interactions. We value your views as well as your support.
2. The importance of external perspectives to us underpins the theme of my speech this morning which is the ‘Goldilocks conundrum’.
3. I think all of you know this fairy tale. The version that we are familiar with involves a young girl who enters the forest home of a family of bears – Papa Bear, Mama Bear and Baby Bear. She is tired and sits in their chairs, hungry and eats their porridge, and finally sleeps in their beds. Each time she tries all three chairs, bowls of porridge and beds, finding them initially too hard or soft, or too hot or cold, until on the third attempt she finds them just right.
4. Most of us would have read this fairy tale just for fun though I’m sure you will not be surprised to learn that there are several interpretations of it. The aspect I will focus on is the journey of discovering what “just right” is. Goldilocks had three choices and on each occasion she only came to what was right for her on the third attempt. It underscores how the right choice is never obvious and requires experimentation, the willingness to try again, and the ultimate search for the right balance.
5. I think we can all agree that notwithstanding the fact that none of the three choices was obvious, Goldilocks had it easy. She only had three possibilities to consider and one of them was, as the story goes, exactly the right one for her. Whichever choice she made also did not have any consequences for others, and only affected her for the brief moment it took her to know that it was not the right one for her. If only that was true for SGX RegCo, or indeed any other regulator, in the complex space that we have oversight of. How nice it would be for the board and management if we know that in all the issues we have to grapple with only A, B and C need to be considered, and even if we initially picked the wrong option it would not adversely affect anyone.
6. But we do not have this luxury. Oftentimes, the issues that regulators have to grapple with are complex, assuming that the regulator has sufficiently discerned the true nature and contours of the issue in the first place. The regulator will then have to identify optimal policies and solutions for the issue which is challenging because many considerations have to be taken into account, and the solutions often have to be devised with imperfect information. Finding that balance – what is “just right” – is therefore a difficult exercise even when undertaken with the best intentions and motives.
7. Let me highlight this with some examples.
Disclosure based system
8. More than 20 years ago, government established the Corporate Finance Committee to make recommendations with the view of making Singapore a key financial centre for international corporate fundraising activity.
9. The Committee’s report was issued on 21 October 1998 and among other things recommended that Singapore should move her regulatory approach from a merit based one to a disclosure based one.
10. There were a number of reasons for this which you will immediately appreciate. In essence, regulators will often not be the best persons to determine the merits of investment decisions, and a merit based system also suggests that there is a government stamp of approval which dis-incentivises personal responsibility and self-reliance.
11. Having said this, I don’t think there is any country in the world that has only a merit based or disclosure based approach. There will be elements of both and the question is which approach is the dominant one or what is the mix of elements from both approaches. Put in another way, what is the place that is “just right” in the continuum that is merit based at one end and disclosure based at the other? So while we adopt the disclosure based approach as a starting point, SGX RegCo may from time to time refuse applications for listing where applicants don’t meet our criteria or if there are public interest grounds. There will in other words continue to be an element of regulatory oversight and intervention.
12. At the same time, many in Singapore advocate the view that SGX should be more interventionist, given the relatively small number of institutional investors, analysts, and even the absence of class action lawsuits. This is not an unreasonable perspective. Arguably, the predominantly disclosure based system in the United States is augmented by the existence of class actions which can potentially impose significant costs on companies and boards where compliance has been found wanting. I think you can sympathise with me when I say it is not often obvious what the best approach is given our different circumstances, the different types of situations that can arise and the imperfect information within which we often have to work. While it seems clear to me that RegCo must supplement the disclosure based regime with regulatory action, what is less clear are the parameters of this. Speaking pragmatically, I think this is something that will have to evolve over time. RegCo is after all still a young organisation of about 2 years.
Striking the right balance
13. There is a perception that SGX’s regulations are burdensome compared to its counterparts elsewhere. There may even be a sentiment that a regulator is motivated to come up with more and more regulations so that KPIs are met.
14. So when RegCo was established, we took pains to emphasise that it was not our intention to over-regulate the market. While rules are necessary to ensure transparency and an orderly trading environment, rules must ultimately support the ecosystem positively and not impose unnecessary costs.
15. In this regard, RegCo has sought to incentivise companies to be good citizens. For example, under the Fast Track programme, companies with good corporate governance practices and compliance track records enjoy priority clearance for selected corporate actions. Another example is the recently launched Automated Clearance Regime which facilitates swifter time-to-market for certain corporate actions.
16. Initiatives such as these have been universally welcomed. There have, however, also been more controversial issues, 2 of which I shall outline.
17. The first relates to the proposal to allow dual class shares in appropriate cases. As you know, dual class shares are allowed in certain jurisdictions, such as in the United States and Hong Kong. It seems to have been used primarily by technology companies where continued control and involvement by a visionary leader is regarded as advantageous.
18. Should SGX do the same? Many believe so as it will provide an option for suitable companies and provides investors with more choices, while others say that this is a fundamental departure from the one share, one vote system and may lead to poor corporate governance.
19. Such arguments highlight the tension between disclosure and merit based approaches. Unlike a country where citizens do not have a choice as to their citizenship (though they can leave if they wish and are able to do so), shareholders have a choice whether to invest in a company or not. If they want to do so in a company with a dual class share structure, should the regulator disallow this by prohibiting such a structure altogether?
20. There is also perhaps a certain irony in objecting to a share structure that is weighted but treating as entirely permissible share structures where certain shareholders have no vote whatsoever. Some may say that in the latter there is a right to a preferential dividend but the point is that these are completely disenfranchised shareholders, and at least in a dual class share structure the shareholders all have rights of representation and voting albeit on a reduced scale. Many corporate law scholars believe that the corporate structure is and should be a malleable one but whether you accept this or not, it seems to me that if the concern is one of an inalienable right to vote as a mark of good corporate governance, there should be vociferous opposition to the issuance of preference shares. But there is not because, at least where preference shares are concerned, this is regarded as an acceptable compromise and individuals should be given a choice of foregoing a right to vote in favour of a preferential dividend. The question can then be posed: should not individuals also be given a choice to subscribe for shares in a company with a dual class share structure, particularly where there are prescribed safeguards given that a number of other jurisdictions already allow this?
21. RegCo attempted to strike some form of balance by allowing dual class share structures with a number of safeguards such as stipulating matters where each share would only have one vote, e.g. where independent directors/auditors are to be appointed or removed, delisting, and variations to the rights of shareholders or the company’s constitution. Another example is limiting the weightage allowed to a maximum of 10 votes per share.
22. The second example relates to quarterly reporting. It is often argued that this gives rise to short-termism though if you ask me half-yearly reporting also does this; it is just a matter of degree and I don’t think the difference is all that significant though everyone accepts that there must be a measure of regular reporting when shares are held by the public. The question as always is what is “just right”?
23. My personal view is that quarterly reporting imposes a burden on companies that may not be commensurate with its supposed benefits given that the listing manual already obliges companies to disclose material matters on a timely basis.
24. Interestingly, some exchanges, e.g. in the UK have moved away from quarterly reporting. This is significant because from memory the need to align with international best practice was one of the principal reasons why Singapore adopted quarterly reporting. Regulators in the US are also conducting a review of the quarterly reporting regime in light of feedback from investors that the current practices have caused the capital markets in the US to have an unhealthy short-term focus at the expense of long-term strategy and growth.
25. Yet at the same time, despite the obligation of continuous reporting, there remain some segments of investors who are in favour of retaining quarterly reporting because they feel that more frequent disclosure is always better.
26. RegCo, after consultation with stakeholders, debated one of the following 2 approaches. The first is the complete abolition of quarterly reporting. The second is to liberalise the framework, e.g. increasing the market capitalisation of companies that need to engage in quarterly reporting, and giving companies the option of not adopting quarterly reporting if its shareholders at a general meeting agree, with shareholder agreement having to be renewed periodically. Our final proposal, after considering the feedback received during the consultation, is now before MAS for its consideration.
27. Complex as the above issues may be as they involve competing policy considerations and the need to find the right balance, sometimes it is even more difficult to know how best to intervene in a market situation. A regulator that is overly aggressive may end up making matters worse and being accused of causing significant value to be lost, while one that acts inappropriately will not stop further harm from being caused. And the regulator will often have to make a judgment call without all the necessary facts before it.
28. The above illustrates some of the challenges faced by RegCo as it works to foster trust in the market while ensuring efficiency. Getting the right nuance and balance is crucial. The question is how this is to be done effectively where the issues can be complex and the information incomplete. You will not be surprised if I say there is no ‘silver bullet’. But there are things that a regulator can do to maximise the prospects of coming to an acceptable outcome and the root of this in my view is culture. Let me explain.
29. Any industry or human activity generally begins as a reaction to a market or societal need. As the industry or activity becomes more prevalent, concerns inevitably emerge. These concerns include competition issues, misinformation, charlatans, fraud, market failure, etc, all of which generate a need to protect sections of the public. This is when regulation begins.
30. Even as the need for regulation arises, it is always important to remember first and foremost that the desire for regulation is an ex post event. By this I mean that regulation becomes necessary as a response to a development that has taken off because society has first and foremost found the activity or industry relevant and useful. There would be no need for regulation if not for such a development in the first place. The obvious implication then is that unless the industry or activity continues to thrive, there is no role for the regulator. The regulator must therefore be mindful of the need not to choke the industry or activity to the point that its very usefulness is eroded, while at the same time ensure a reasonable level of protection for appropriate segments of the public.
31. Yet even though all of us can agree that getting the balance right is important, it is not easy to do so for reasons I alluded to earlier. It is like the common saying that common sense is often not common at all. First, we all have gaps in our ability to see the issues in their proper context and the appropriate solutions because of informational asymmetry, lack of experience, and our own biases that have been shaped by our life experiences.
32. Second, there is often a lot of ‘noise’ – and I don’t mean the term in a pejorative way – and it can be difficult not to be swayed by the loudest, most strident voices, or even to keep the proper perspective given the multitude of voices.
33. Third, regulatory organisations tend to be on the conservative side of the spectrum and rightly so. But this strength is also a weakness if regulatory organisations are unable to take decisive action or change course early enough when necessary.
34. Fourth, when organisations exist they tend to want to do more. This is both a strength and weakness. I sometimes feel that in Singapore there seems to be an incessant drive to develop KPIs to continually demonstrate relevance, drive and initiative. While it is not necessarily bad, from my experience I have on a number of occasions seen perfectly useless things being done at great cost in time and money. These might sound or look good but they add next to nothing of value to what already exists. At their worst, they destabilise a perfectly good state of affairs. Regulatory organisations must resist the urge to add more and more to the rulebook and should also ask themselves if there is anything in existence that perhaps is no longer relevant.
35. Fifth, and this is related to some of the preceding points, regulators can be prone to knee jerk reactions especially after some scandal or the other and the ensuing public outcry and even criticism. We should be mindful of imposing regulations in haste only to regret at leisure.
36. What can be done about this? How can we ensure that as a regulatory organisation we try to avoid these pitfalls? It is easy to criticise and explain after the fact why things went wrong; it is far more difficult to provide solutions ex ante.
37. In this regard it is important to develop the right organisational culture so as to maximise the prospects of a balanced, enlightened and robust approach towards regulation. The type of organisational culture the board and management at RegCo are striving for should have the following characteristics.
38. First, while all organisations have hierarchies, SGX RegCo should strive to be as egalitarian and flat an organisation as possible. Sometimes little things such as the non-use of titles or salutations can go a long way towards building such a culture. Overly hierarchical and formal structures can inhibit the free flow of ideas.
39. Second, we must ensure a culture where everyone feels that their views are valued. At a minimum this will prevent too much ‘groupthink’. At its best, it encourages people to think about and express how they think the organisation can do things better. A diversity of views is more likely to give rise to optimal outcomes and better solutions than a narrow range of ideas. There is little to be lost when people within the organisation feel invested enough to give their considered views on a matter rather than simply going along with the flow.
40. Third, we must listen well as an organisation to outside voices, i.e. start with the presumption that everyone’s view has value and listen to them carefully. Aside from the goodwill generated by the other person that you have at least given him or her a fair hearing whether you agree or not, there will often be occasions where such views have value. Whether we like it or not, there is a lot all of us do not know. And of the things we do not know, some of them are things we do not know we don’t know – “unknown unknowns” as a notorious person once said. Hearing with open minds what others have to say can educate us, especially on the “unknown unknowns”, because those on the outside can sometimes better see what we on the inside are blind to.
41. Fourth, whenever we face criticism let us ask ourselves as honestly as we can whether we could have done better. This is difficult to do but it is so crucial because if not done properly we will never learn from any mistakes that may have been made and this only sets us up for potentially more criticism in future. Humility is necessary and important.
42. Fifth, where we have not dealt with a situation as well as perhaps we could have, it is important to not only embed the lessons well but to also have the resilience to bounce back. Mistakes are inevitable however good an organisation is. Whether it continues to be a good organisation or even a better one will depend on whether it is able to learn from its mistakes and recover.
43. From the above, some of you may discern a general theme. Underpinning all my five points is the idea of the ‘learning organisation’. A regulator that does not see itself as the finished product but is always learning, always wanting to improve will be a conscientious, forward looking and dynamic organisation. It will make mistakes but they will be fewer and less serious, and it will maximise its prospects of not repeating such mistakes in future. At SGX RegCo this is the type of leaning organisation that we continue to strive to be, knowing that the striving is a continuous and evolving one.
44. Thank you.
