Thursday 3 December 2009
Get stockbrokers in on governance
Why is it that when scandal rocks the stock market - as it has this year with the high-profile problems at various China companies listed on the Singapore Exchange (SGX) - nobody looks at the role that the stock broking community might have played in safeguarding investors’ interests?
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Get stockbrokers in on governance
By R SIVANITHY
03 December 2009
Why is it that when scandal rocks the stock market - as it has this year with the high-profile problems at various China companies listed on the Singapore Exchange (SGX) - nobody looks at the role that the stock broking community might have played in safeguarding investors’ interests?
After all, is it not true that stockbrokers owe the public a fiduciary duty, a duty that requires the exercising of the highest possible standard of care, in law or equity, when acting in the public’s interest?
Instead, most of the criticism for corporate failures is directed at SGX, company directors, external auditors and sometimes ratings agencies, as if these were the only ones who should be held accountable. For sure, these parties have to be held partially accountable - but they are not the only ones.
Brokers have such close, first-hand contact with the corporate sector as well as the investing public that they are arguably much better positioned than anyone else to fulfil a gate keeping role.
You could even go so far as to say that brokers should form the first line of defence between an often gullible investing public on one side and a possibly dodgy business community on the other.
Yet when a company fails - not just one from China - brokers who may have previously written glowingly about that company to their clients are completely overlooked when the finger-pointing starts.
Consider, for example, that SGX’s main regulatory concern apart from enforcement of its Listing Manual rules is the detection of suspicious trading activity via its day-to-day surveillance of trading patterns.
It does sometimes query companies on items contained in the latter’s accounts but, by and large, quality control is left to others to determine since the Exchange does not have the requisite resources.
As a result, SGX doesn’t concern itself too much with the merits of a stock as an investment - which is the preferred approach in a disclosure-based, caveat emptor regime.
Consider also that external auditors visit their clients’ premises usually only twice a year - to perform an interim audit, and then a final one.
On both occasions, audit staff operate under tight time and budgetary constraints, which means that the accounts are only selectively checked in order to give a certain minimum degree of statistical confidence as to their accuracy. Because of this and because it is almost impossible for auditors to detect wrongdoing if there is collusion between key functions, any fraud can pass undetected.
As for independent directors, regular readers would be familiar with their deficiencies: insufficient training, inadequate accounting knowledge and, in many cases, no real independence from top management.
Brokers, on the other hand, spend plenty of time with the managements of the companies they track. They attend analyst briefings, road shows, luncheon presentations and overseas site visits.
Through constant contact with chief executives and chief financial officers, they are able to form valuable opinions about the integrity and dependability of these company officers.
Furthermore, when new companies list, brokers benefit from placement fees, underwriting commissions and increased brokerage from trading. They also make money as distribution agents for investment products, as they did for the many failed structured products issued by US investment banks in 2007.
Their ‘buy’ and ‘sell’ recommendations can exert profound effects on share prices and, for the majority of retail investors, a dealer or remisier in a broking house is often their first and only port of call when investing in equities and equity-linked products.
Why is it then that, if broking houses and their staff play such a pivotal role in the investment chain, nobody ever thinks of how such a vital function can be better utilised to protect the public’s interest?
When asking this question, two common responses were received: ‘It’s just too difficult’ and ‘that’s not what you traditionally expect from the profession’. Then what is? That the profession remains a community of simple order executors, middlemen with little or no input in enhancing governance or protecting public interest?
In other jurisdictions, there is a growing awareness that brokers can be made to play a bigger role in enhancing governance.
In Australia, the UK and the US, for example, the authorities now want to ensure responsible handling of rumours by making brokers sift through the thousands of rumours that float through the market and filter out those that are frivolous and without basis.
In its September discussion paper on the subject, the Australian authorities have proposed that only those rumours which brokers believe to have some basis can be passed on to clients.
Meanwhile, it is also proposed that brokers be prohibited from originating rumours while simultaneously maintaining a rumour log to show what steps they took to discern a rumour’s basis before passing it on. (See Hock Lock Siew, BT, Sept 25 - ‘Should rumours be regulated?’)
So far, there has been no discussion in Singapore on how stockbrokers can be made to play an enhanced role in strengthening governance. It’s an odd ‘blind spot’ that should be addressed. ‘Difficult’ should not be equated with ‘impossible’.
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