Wednesday, 24 June 2009
SGX’s light touch regime hinders national aim
The risk of overreaction to corporate governance failures seems to be a constant theme in articles, and in speeches by regulators and government ministers here. We are often told that no amount of rules will prevent fraud and wrongdoing, and therefore there are limits to what regulation can do.
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SGX’s light touch regime hinders national aim
I REFER to the editorial ‘Important to guard against overreaction’ (BT, June 23).
The risk of overreaction to corporate governance failures seems to be a constant theme in articles, and in speeches by regulators and government ministers here. We are often told that no amount of rules will prevent fraud and wrongdoing, and therefore there are limits to what regulation can do.
The reality is that compared to the developed markets such as the US, the UK and Australia, and regional markets such as Hong Kong and Malaysia, we now arguably have the least regulated equity market. There is no Sarbanes-Oxley, no director disqualification regulations, no ‘say on pay’ legislation on executive pay, few enforcement actions (with insider trading enforcement actions a notable exception), a low bar on director independence - the list goes on.
It is true that more legislation is not necessarily the answer and while I have included the US in the list above, regulatory failures in the US was a major contributory factor to the current crisis.
My view is that the US over-reacted to the corporate governance failures at the beginning of this decade, such as Enron and Worldcom, by enacting a piece of legislation - the Sarbanes Oxley Act (SOX) - that addressed the symptoms rather than the causes. It was very much a response to accounting-related irregularities, as much of the reforms in that legislation was aimed at fixing accounting-related deficiencies.
For this reason, I have never spoken out in favour of adopting SOX here although there are some elements of SOX which we should seriously consider. However, in another sense, the US under-reacted to those failures, and other failures, because it failed to address more fundamental problems with its corporate governance framework, such as those related to appointment of directors, and board and shareholder oversight of executive compensation.
It is now considering reforms in these areas. We should therefore not allow the SOX example - of draconian legislation failing to prevent the current financial crisis - to blind us to the possible need for regulatory reforms here. If a patient goes to a doctor, and the doctor gives the wrong medication and the patient dies, we do not stop prescribing medication, do we?
We should be more creative and bolder when reviewing our regulatory frameworks. While we need to ensure that our regulatory framework is not so complex and different from other developed economies that investors and companies find it difficult to understand, thereby raising the costs of investing and doing business, we also need to recognise that there are features of our landscape which make a ‘cut and paste’ approach unsuitable.
One good example is the ownership structure of our public companies. In Singapore, and much of Asia, concentrated ownership by families and founders is common, while in markets such as the US, the UK and Australia, dispersed ownership is the norm. While it is expedient for us to model our laws and regulations on the UK and Australia, we should be prepared to ‘tweak’ our laws and regulations so that they suit our environment. In some areas, we may need stricter rules than those in the other markets.
In the editorial, the issue of foreign companies being deterred from listing here if rules are tightened was mentioned, again a common theme in other articles and speeches. We seem to have sidelined the importance of investor protection in building robust capital markets, despite the wealth of research evidence showing the importance of strong investor protection.
Logically, the argument should be as follows. First, we build a robust regulatory framework with effective enforcement. Then, investors will feel secure about investing in equities, knowing that while they will be exposed to business risks of companies, they have some measure of protection against the risk of shoddy governance.
Companies will then come and list here because they know that there will be sufficient liquidity and their securities will be attractively valued. In contrast, we seem to start at the end, trying to get companies to list here, attracting them with our ‘light touch’ regime and then trying to develop patchwork solutions to mitigate problems after the companies have listed.
Building strong capital markets is like the movie ‘Field of Dreams’. If you build it, they will come. ‘They’, in our case, will be long-term investors and good companies. Asking companies to come and list without building the right infrastructure will hinder Singapore’s aim of becoming a respected global financial centre.
Mak Yuen Teen
Co-director
Corporate Governance and
Financial Reporting Centre
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