Tuesday 12 May 2009
Time for govt-nominated directors?
Much has been written about the spate of scandals involving S-chips during the last few weeks. To resolve this problem, several proposals have been made, including calls for greater regulation, higher corporate governance and disclosure standards, a more stringent pre-listing screening process and greater penalties for errant companies.
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Time for govt-nominated directors?
Kevin Ow Yong
12 May 2009
Much has been written about the spate of scandals involving S-chips during the last few weeks. To resolve this problem, several proposals have been made, including calls for greater regulation, higher corporate governance and disclosure standards, a more stringent pre-listing screening process and greater penalties for errant companies.
At the heart of the matter surrounding the scandal-hit firms is the problem of poor corporate governance. Rightly or wrongly, their problems have affected other S-chips by creating a perception that there are hidden problems and that managers and directors are not forthcoming enough in allaying investors’ concerns.
This problem is not trivial. It took more than two years before investors relooked at S-chips after a similar corporate governance-related incident happened with China Aviation Oil in 2004. There are huge costs and missed opportunities for all parties involved when investors shun stocks because of perceived corporate governance problems.
Solution required
If poor corporate governance (or its perception) is the major source of the problem plaguing S-stocks, then a corporate governance solution is required. Greater regulation of S-chips can only do so much if the root problem is not eradicated. After its restructuring, China Aviation Oil took significant steps to improve its corporate governance practices. Without these measures in place, it is questionable whether investors would have dared to invest in a former scandal-hit company.
Similarly, unless concrete measures are taken to address the perception problems surrounding S-chips, it might take a while to restore investor confidence in foreign stocks listed in Singapore. This will not be beneficial to Singapore’s reputation as a financial centre nor the Singapore Exchange’s (SGX) ambitions to attract quality foreign listings.
The core of the problem surrounding foreign listings is literally that these firms are run by foreigners. There is investor unfamiliarity (or suspicion) surrounding how these operations are run, who are the key players managing them and even where their excess cash is deposited.
Granted, the SGX mandates two local independent directors for foreign listings, partly to address the above issues. However, it is not clear how effective this measure is, given that the nomination process for these local independent directors is not transparent. Hence, the market cannot be sure whether these directors are able to sufficiently protect shareholders interests.
The problem is actually more deep-rooted. Since the separation of ownership and control in companies became pervasive, independent directors historically acted as a restraining and disciplining mechanism towards bad managers. To perform their duties effectively, these directors need to be qualified, diligent and most importantly, be free from management influence.
Board quality and independence is a topic that is extensively researched because there have always been doubts about the independence, quality and diligence of independent directors throughout the capitalist world.
Left to free market forces, it is also often the case that the best (or richest) companies are also the firms most likely to attract good, quality independent directors, and vice versa. Ironically, well-run firms - which would benefit relatively less from incremental improvements in corporate governance - do not have difficulty attracting high-quality persons to their boards, while badly-run companies that would benefit greatly from having a strong independent-minded board of directors continue to suffer from the lack of it.
The reason is straightforward. It takes courage and commitment for a well-qualified person to agree to be an independent director of a smaller, riskier company for which the rewards of directorship are relatively small, if he could instead choose to be a director of a bigger, more well-run company.
This does not mean that all independent directors in small companies (or foreign listings) are inferior; there are many who have been doing a good job in protecting shareholder interests. The point is that small firms face huge challenges in recruiting good quality independent directors.
A central lesson from the recent sub-prime crisis is that market failures can and do occur and that self-regulation (or no regulation) is not always the optimal solution. I believe the recent spate of scandals surrounding S-chips suggests a need for more innovative measures to repair the perceived lack of corporate governance in S-chips and to restore investor trust. We need to address headlong how investors’ interests in these foreign firms can be protected.
I suggest a radical proposal. Create a new corporate governance mechanism - government-nominated directors. Rather than allow free market forces to solely dictate the selection of independent directors, for which there might not be sufficient accountability, install two additional government-nominated directors to augment the current board. These nominated directors should come from a pool of suitably qualified candidates identified by a quasi-government organisation whose sole mission is to recruit a pool of potential directors.
These people would be appropriately screened and trained so that they understand the roles and responsibilities of being a director. More importantly, they would understand that they are accountable not just to the shareholders of the company that they serve, but also to the quasi-government body which recruited them.
If it is not too politically sensitive and does not create any conflict of interests, some of these candidates could be drawn from the civil service or statutory boards, where we have arguably a huge pool of talented Singaporeans on which we can tap. Because being an independent director is not a full-time job, they can still retain their day-time jobs.
There are several advantages to this proposal. It addresses in one swoop some of the long-standing concerns surrounding directors, notably board independence, quality and diligence.
These government nominated directors would be ‘truly’ independent because they would not be beholden to the managements of the firms that they serve. Nor would their nomination as directors be determined by the company management.
There would also be an assurance of quality and commitment on their part because they have to explicitly report and account to the quasi-government body, instead of just being answerable to the more vague demands of shareholders.
Thus, forming such a body of nominated directors could potentially improve the general level of corporate governance in boardrooms.
These directors would serve as catalysts of change, initiating best practices in the companies that they serve and red-flagging dubious practices, if any. Thus, minority investors would have the assurance that these nominated directors will protect their interests, and Singapore would retain and even improve its standing as a financial hub.
There are some drawbacks to this proposal. Just because a firm happens to have government-nominated directors, investors should not assume that it would never commit fraud. After all, the nominated directors would serve in non-executive positions and would perform oversight functions at best.
Legal protection
There would also be a need to legally protect these nominated directors should a fraud occur as a result of issues beyond their control. Measures to prevent them from being overzealous in their drive to instil effective controls in the firms should also be in place.
Finally, managements might not be receptive to externally nominated directors, regarding them as an intrusion.
Of course, as with many things, execution is the key. A decision to adopt this measure would require long-term commitment on the part of the Singapore government as well as a certain amount of resources and manpower. To ensure that this plan is to be well-executed, we may first want to start with a pilot scheme on a voluntary basis by firms electing to include government-nominated directors into their boards. Such an approach might also avoid some of the necessary legal reforms in implementing this plan, which would require substantial changes to the Companies Act.
To sum up, most would agree that there is a need to rectify the current dismal situation of S-chips. The above proposal should be construed as one of several potential measures to improve the situation. While it is certainly radical and goes against some free market principles, it is potentially a way to do things differently from the rest of the world because of our unique situation and circumstances, the strength of our political system and the quality of our people. The proposal might also help resolve some of Singapore’s problems with foreign listings.
The writer is an assistant professor of accounting at Singapore Management University. He is also a CPA and a CFA charter holder
Dollar Rally Will End, Rogers Says; May Short Stocks
By Chen Shiyin and Haslinda Amin
May 12 (Bloomberg) -- The dollar’s rally is set to end in a “currency crisis,” investor Jim Rogers said, adding that he may bet on a slide in equities after nine weeks of gains.
The advance in the U.S. currency has been driven by investors covering their short sales, Rogers, 66, said in an interview with Bloomberg Television in Singapore. He may consider adding to his holdings of the yen and prefers the euro to the dollar or the pound, the investor added.
“We’re going to have a currency crisis, probably this fall or the fall of 2010,” Rogers said. “It’s been building up for a long time. We’ve had a huge rally in the dollar, an artificial rally in the dollar, so it’s time for a currency crisis.”
The dollar has climbed against all of the so-called Group of 10 currencies except the yen over the past 12 months, according to data compiled by Bloomberg. The U.S. currency was at $1.3592 per euro today from $1.3582.
Rogers joins “Black Swan” author Nassim Nicholas Taleb in avoiding the U.S. currency. Taleb told a May 7 conference in Singapore he preferred gold and copper to the dollar and the euro as the global economy faces a “big deflation.”
Gains in U.S. stocks also signal a “correction,” Rogers said. He’s avoiding equities for the next two to three years because prospects haven’t changed, he added.
‘Correction’
The Standard & Poor’s 500 Index has jumped 34 percent from its March 9 low, erasing its losses for the year. The gauge plunged 38 percent in 2008, its worst year since the Great Depression.
“The market in the U.S. went up very powerfully for nine weeks in a row so of course it’s time for a correction,” Rogers said. “Fundamentals haven’t changed if you ask me. I don’t see the stock market as a great place to be in the next two to three years.”
Rogers said on Feb. 11 he had renewed bets that U.S. stocks including International Business Machines Corp., General Electric Co. and JPMorgan Chase & Co. will drop. The S&P 500 fell 19 percent before reaching its March low.
Equity markets may dip below recent lows as more troubles lay ahead in the financial market, Rogers said in a separate interview on April 13. Rogers is the author of “A Bull in China: Investing Profitably in the World’s Greatest Market.”
“Technical indicators suggest the market is overheating and investors are ready to take profit after recent gains,” Toshio Sumitani, a strategist at Tokai Tokyo Securities Co., said today.
Asian Stocks
Asian stocks fell from a seven-month high, led by banks and mining companies, as investors sold shares trading at their most expensive valuations in five years. The MSCI Asia Pacific Index fell 1.3 percent to 97.25 as of 1:47 p.m. in Tokyo, snapping a six-day advance.
Meredith Whitney, the former Oppenheimer & Co. analyst who predicted a slide in U.S. bank shares, said yesterday she wouldn’t advise investors to short-sell the stocks because of the government’s influence. Still, she wouldn’t own these companies because many banks are sitting on “rotting assets,” Whitney added. She advised short-selling retail and consumer discretionary companies as more jobs are cut and consumer spending declines.
Rogers owns some Chinese and Japanese stocks, and also continues to hold some shares of airlines, he said without naming any companies. Stocks in nations such as Canada and Brazil that supply natural resources may also perform better than U.S. shares, Rogers added.
Commodities are still among the best bets for investors because of constrained capacity, the investor said. He has been buying agriculture-related commodities and prefers silver to gold, palladium and platinum, Rogers added.
Ships Tread Water, Waiting for Cargo
By KEITH BRADSHER
May 12, 2009
SINGAPORE — To go out in a small boat along Singapore’s coast now is to feel like a mouse tiptoeing through an endless herd of slumbering elephants.
One of the largest fleets of ships ever gathered idles here just outside one of the world’s busiest ports, marooned by the receding tide of global trade. There may be tentative signs of economic recovery in spots around the globe, but few here.
Hundreds of cargo ships — some up to 300,000 tons, with many weighing more than the entire 130-ship Spanish Armada — seem to perch on top of the water rather than in it, their red rudders and bulbous noses, submerged when the vessels are loaded, sticking a dozen feet out of the water.
So many ships have congregated here — 735, according to AIS Live tracking service of Lloyd’s Register-Fairplay Research, a ship tracking service based in London — that shipping lines are becoming concerned about near misses and collisions in one of the world’s most congested waterways, the Strait of Malacca, which separates Malaysia and Singapore from Indonesia.
The root of the problem lies in an unusually steep slump in global trade, confirmed by trade statistics announced on Tuesday.
China said that its exports nose-dived 22.6 percent in April from a year earlier, while the Philippines said that its exports in March were down 30.9 percent from a year earlier. The United States announced on Tuesday that its exports had declined 2.4 percent in March.
“The March 2009 trade data reiterates the current challenges in our global economy,” said Ron Kirk, the United States trade representative.
More worrisome, despite some positive signs like a Wall Street rally and slower job losses in the United States, is that the current level of trade does not suggest a recovery soon, many in the shipping business say.
“A lot of the orders for the retail season are being placed now, and compared to recent years, they are weak,” said Chris Woodward, the vice president for container services at Ryder System, the big logistics company.
Western consumers still adjusting to losses in value of their stocks and homes are in little mood to start spending again on nonessential imports, said Joshua Felman, the assistant director of the Asia and Pacific division of the International Monetary Fund. “For trade to pick up, demand has to pick up,” he said. “It’s very difficult to see that happening any time soon.”
So badly battered is the shipping industry that the daily rate to charter a large bulk freighter suitable for carrying, say, iron ore, plummeted from close to $300,000 last summer to a low of $10,000 early this year, according to H. Clarkson & Company, a London ship brokerage.
The rate has rebounded to nearly $25,000 in the last several weeks, and some bulk carriers have left Singapore. But ship owners say this recovery may be short-lived because it mostly reflects a rush by Chinese steel makers to import iron ore before a possible price increase next month.
Container shipping is also showing faint signs of revival, but remains deeply depressed. And more empty tankers are showing up here.
The cost of shipping a 40-foot steel container full of merchandise from southern China to northern Europe tumbled from $1,400 plus fuel charges a year ago to as little as $150 early this year, before rebounding to around $300, which is still below the cost of providing the service, said Neil Dekker, a container industry forecaster at Drewry Shipping Consultants in London.
Eight small companies in the industry have gone bankrupt in the last year and at least one of the major carriers is likely to fail this year, he said.
Vessels have flocked to Singapore because it has few storms, excellent ship repair teams, cheap fuel from its own refinery and, most important, proximity to Asian ports that might eventually have cargo to ship.
The gathering of so many freighters “is extraordinary,” said Christopher Pãlsson, a senior consultant at Lloyd’s Register-Fairplay Research, a ship tracking service based in London. “We have probably not witnessed anything like this since the early 1980s,” during the last big bust in the global shipping industry.
The world’s fleet has nearly doubled since the early 1980s, so the tonnage of vessels in and around Singapore’s waters this spring may be the highest ever, he said, cautioning that detailed worldwide ship tracking data has been available only for the last five years.
These vessels total more than 41 million tons, according to the AIS Live tracking service. That is nearly equal to the entire world’s merchant fleet at the end of World War I, and represents almost 4 percent of the world’s fleet today.
Investment trusts have poured billions of dollars over the last five years into buying ships and leasing them for a year at a time to shipping lines. As the leases expire and many of these vessels are returned, losses will be heavy at these trusts and the mainly European banks that lent to them, said Stephen Fletcher, the commercial director for AXS Marine, a consulting firm based in Paris.
In previous shipping downturns, vessels anchored for months at a time in Norwegian fjords and other cold-weather locations. But stringent environmental regulations in practically every cold-weather country are forcing idle ships to warmer anchorages.
But that raises security concerns. Plants grow much faster on the undersides of vessels in warm water. “You end up with the hanging gardens of Babylon on the bottom and that affects your speed,” said Tim Huxley, the chief executive of Wah Kwong Maritime Transport, a shipping line based in Hong Kong.
One of the company’s freighters became so overgrown that it was barely able to outrun pirates off Somalia recently, Mr. Huxley said. The freighter escaped with 91 bullet holes in it.
Another of the company’s freighters close to Singapore was hit last December by a chemical tanker that could not make a tight enough turn in a crowded anchorage; neither vessel was seriously damaged.
Capt. M. Segar, the group director for Singapore’s port, said in a written reply to questions that many vessels were staying just outside the port’s limits, where they do not have to pay port fees.
Singapore has complained to the countries of registry about 10 to 15 ships that have anchored in sea lanes in violation of international rules in the last two weeks, Captain Segar said.
Ships are anchoring at other ports around the world, too. There were 150 vessels in and around the Straits of Gibraltar on Monday, and 300 around Rotterdam, the Netherlands, according to the AIS Live tracking service.
But Singapore, close to Asian markets, has attracted far more.
“It is a sign of the times,” said AIS Martin Stopford, the managing director of Clarkson Research Service in London, “that Asia is the place you want to hang around this time in case things turn around.”
Short on bonuses and high on stress
Local professionals among worst hit by cost cutting and overwork: survey
By JOYCE HOOI
May 13, 2009
(SINGAPORE) The typical Singaporean professional is cowering at his desk, a sneezing and overworked heap, if the numbers are to be believed.
The latest Robert Half survey indicates that local professionals have gotten the shortest end of the stick globally, being on the receiving end of cost-cutting and management ineptitude in bad times.
Some 59 per cent of respondents in Singapore reported bonuses being cut or lowered - the highest globally. Coming in a distant second in the region is Hong Kong, with 42 per cent.
Local firms have also reported among the highest incidents of hiring freezes, with 55 per cent of firms no longer hiring in view of the economic climate, compared to the global average of 42 per cent.
Even as local companies trim the fat, with budget cuts being cited as the main reason for shrinking finance and accounting teams, employees in Singapore who are already overworked will have no respite. Some 55 per cent of local respondents do not expect their employers to give them the option of shorter work-weeks in order to cut costs.
None of this bodes well for workplace stress levels, with 69 per cent of local employees foreseeing an increase in stress for the rest of the year, second globally only to Japan, where 71 per cent of respondents feel the same way.
'We are living in very uncertain times and I would not be surprised if visits to psychologists increase, because some people cannot handle the stress,' said Paul Heng, managing director of Next Career Consulting.
Even if their immune systems were to fall prey to stress, employees in Singapore will not be calling in sick. The top three reasons cited by local respondents for coming in to work despite being ill are all fear-related: the fear of falling behind on work; being perceived by superiors or peers as not working hard; and having too many sick days count against them.
However, what some might call 'fear', others call 'character-building'.
'There are junior employees in the finance and accounting industries who have lived only through upswings and take sick leave if they so much as have a sniffle. The current situation will improve their work ethic, resilience and productivity,' said Tulika Tripathi, managing director of Michael Page Singapore.
When employees are not at work, they are thinking about it. Sixty-five per cent of respondents here spend a daily average of 30 minutes or more on work emails after work hours, against the global average of 57 per cent.
All this is par for the course in this era, according to Mr Heng. 'It is necessary especially when you work for global companies with operations in different timezones. You still have to answer emails at 11pm,' he said.
Such high levels of strain being borne by employees will have negative implications for firms, warns Tim Hird, managing director of Robert Half Singapore.
'Very often, cost-reduction measures that cause undue pressure to workers not only lead to a loss in valuable talent, but also adversely impact the company's overall performance and eventually its bottom line,' said Mr Hird.
With quality of life coming under siege for the white-collar worker in Singapore, it is no wonder that what they crave most is non-monetary in nature. 'Open and honest communication' and 'manageable staff workloads' were the top two most desired elements for improving employee morale, with 34 per cent and 19 per cent of employees voting for them, respectively.
The survey polled 6,167 managers across 20 countries, 202 of whom were based in Singapore.
China Huaneng Said to Seek S$2.25 Billion Tuas Refinance Loan
By Katrina Nicholas
May 12 (Bloomberg) -- China Huaneng Group, the nation’s biggest power producer, is in talks with 10 banks to refinance a S$2.25 billion ($1.54 billion) loan it obtained from six lenders last year, a person familiar with the matter said.
The Beijing-based utility added Natixis SA, Societe Generale SA, ING Groep NV and NAB Capital, a Hong Kong-based unit of National Australia Bank Ltd., to a group of six banks that helped it borrow in March 2008, said the person, who declined to be identified because details are private.
China Huaneng’s bridge loan, which was used to fund its S$4.24 billion purchase of Tuas Power Ltd. from Singapore’s Temasek Holdings Pte., matures in August, the person said. Calls to China Huaneng Vice President Huang Long seeking comment weren’t immediately returned.
Borrowing costs soared last year after the September collapse of Lehman Brothers Holdings Inc. shuttered credit markets and banks hoarded cash to cope with more than $1.4 trillion of losses and writedowns. This year costs have declined amid pledges from the Federal Reserve and U.S. government to spend $12.8 trillion to bail out the banks and spur lending, the benchmark Libor-OIS spread shows.
China Huaneng increased generating capacity by 20 percent last year after adding Singapore-based Tuas Power’s assets, it said in January. Chinese electricity producers are expanding overseas as state-controlled prices prevent domestic generators from passing on higher coal costs.
Bankers working on the refinancing loan are using GDF Suez SA, the world’s second-biggest utility by market value, as a pricing benchmark, the person said today.
Paris-based GDF this month completed financing for its al- Dur water and power project in Bahrain, which included a $1.2 billion loan, the person said. GDF paid as much as 365 basis points over the London interbank offered rate, the person said.
BNP Paribas SA, Calyon, DBS Group Holdings Ltd., Oversea- Chinese Banking Corp., Sumitomo Mitsui Financial Group Inc. and Fortis provided China Huaneng’s 2008 loan. Nomura Holdings Inc. is advising the borrower on its refinancing.
Who really knows when recession will end?
Experts say world economies will improve next year. But...
By Larry Haverkamp
April 28, 2009
EVERY now and then, we need to take a step back and look at the big picture.
The world's wealth, for instance, stands at around US$200 trillion ($300 trillion). That is the value of everything everyone owns.
Two years ago, it was higher - US$250 trillion - but we lost US$50 trillion in the financial crisis.
By the way, 1 trillion is a really BIG number. It is 1,000 billion, which is four times everything we make in a year - four times Singapore's GDP.
The question of the day is: 'When will this recession end and GDP grow again?'
The official answer is: 'World economies will see gradual improvement from the middle of next year.'
The unofficial answer is: 'Who knows?' This recession is different from anything we have seen in the past. It is a beast that comes at us in the night.
Times have changed
In the US, it used to be easy to get a '100 per cent no-doc home loan'. The homeowner would put down no money of his own and provide no documentation.
If a bank was impolite enough to ask, 'Do you have a job?', the borrower could say, 'Excuse me. Are you prying into my personal life?'.
The bank would then back off.
Nowadays, US home loans require a down payment of at least 20 per cent, up from 0 per cent two years ago.
Company loans are tough to get too, which has brought some businesses - especially in exports - to a near standstill.
On the positive side, less debt means lower risks, so we will see fewer defaults in the future.
The problem is if a home or office building can't get financed, it won't be built. The same for a factory. Fewer things get made and GDP grows slowly, if at all.
It means, for the first time in history, our children may end up with lower living standards than their parents. We may have to go back to living 'the simple life'.
That was the name of Paris Hilton's reality TV show. Perhaps she can show us how to do it.
* * * * * * * * * * * * * * * * * *
Good v bad risk
US$200 trillion in world wealth is small compared to the new centrepiece of this recession: derivatives.
They are US$1,232 trillion, which is - get ready - US$1.232 quadrillion. A quadrillion is 1,000 trillion, or 1 followed by 15 zeros.
By the way, did you know that a googol is 1 followed by 100 zeros? That's huge.
Back to derivatives.
In June 1998, the underlying value of privately traded (over the counter) derivatives was US$75 trillion.
Ten years later, it had grown to US$684 trillion.
The other half of the story is exchange traded derivatives like futures and options.
These come to US$548 trillion, bringing the grand total to US$1,232 trillion or US$1.232 quadrillion as of June 2008.
Here's how they work
Derivatives make it possible to bet on the rise or fall of interest rates, currencies, oil, food, metals and more.
Instead of buying gold, for example, you can make a bet with a counterparty that gold prices will go up. It is speculation (gambling) and it creates a new risk that wasn't there previously.
Derivatives can also reduce risk through hedging.
Do they reduce risk through hedging (good) or increase it through speculation (bad)?
We can get a hint by looking at the value of all derivatives. As explained, it stands at US$1,232 trillion, which is six times the US$200 trillion value of the world's wealth.
It shows that something besides innocent hedging is going on since there is not that much wealth in the world to hedge. Speculation is likely.
This speculation is crowding out 'good' risk. For example, a bank giving a car loan produces risk, but it is productive since it results in someone owning a car. It boosts GDP. (Good.)
Derivatives speculation also produces risk but it is not productive. It does not add to GDP or the world's wealth. It only shifts it around through counterparty bets that are won and lost. (Bad.)
The move from productive to unproductive risk is a new development. It is a dark force that is unique to this recession.
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