Ong Chong Tee: Corporate governance - a collaborative effort
Opening address by Mr Ong Chong Tee, Deputy Managing Director (Financial Supervision)
of the Monetary Authority of Singapore, at the 7th Corporate Governance Week, Singapore,
26 September 2016
* * *
Mr David Gerald, President and CEO of the Securities Investors Association Singapore
(SIAS),
Distinguished guests, ladies and gentlemen
Thank you for inviting me to deliver this year's Opening Address. Subjects relating to
corporate governance always attract lively debates and discussions, and I have no doubt that
it will be the case over the course of this Conference.
The theme of "Change and Innovation in Governance" underscores the dynamic nature of
corporate governance (or CG) issues. The direction of change will most certainly be towards
greater accountability, transparency and responsibilities of directors. Many will agree that old
standards are not enough; or not good enough. Boards' composition, for instance, will be
subject to greater scrutiny with respect to independence, competence and diversity. I believe
these are overall positive trends.
Allow me to share some thoughts on a few pertinent issues.
Role of the Financial Regulator
Our regulatory regime comprises four key elements: regulations, supervision, enforcement
actions as well as cross-border supervisory co-operation. This four-pronged approach
applies to the area of CG as well.
Many of you would have heard or read about enforcement actions taken by the MAS against
various financial institutions or individuals for market misdemeanours such as spoofing and
front running, as well as for regulatory breaches in money laundering rules or operational
incident lapses. Whenever there are serious regulatory lapses or control failures, these often
reflect shortcomings in the institution's governance as well.
The MAS will carry out enforcement actions to punish those who break our laws and
regulations. We will protect the integrity and reputation of our financial sector. But
enforcement actions are, by definition, ex-post and the proceedings can be lengthy. I would
much prefer that we can rely on ex-ante actions to minimise the risk of wrongdoings. This is
where our regulations and supervisory work come in.
But given the size and sophistication of our financial sector, it is neither possible nor realistic
for the MAS to be able to detect and prevent all bad behaviours or criminal acts. Even
assuming manpower and other resources are not constraints, the MAS will have to be so
intrusive in our supervisory engagements and carry out long periods of on-site inspections
that these would make it hard for boards and management to operate. It is also not ideal nor
desirable for MAS to rely on overly prescriptive and conservative one-size-fits-all rules
without inadvertently stifling legitimate business growth and innovation.
Impetus for Change
This is why good governance driven by boards must feature as an important frontline
defence against bad policies, poor conduct and deficient risk management practices. A
competent management must be complemented by a proactive board that places good
corporate governance as a priority area of focus. This will also be an area of increased
supervisory engagement by the MAS with our financial institutions.
The Singapore Institute of Directors (SID) has issued a series of CG Guidebooks since
August last year and will be releasing its Board Guide in the coming months. This will be a
very helpful document that highlights roles and responsibilities of the Board, and provides
practical tips for directors to internalise CG best practices and discharge their fiduciary
duties.
But the impetus for change will continue. One notable trend is that even as boards continue
to engage shareholders actively for understandable reasons, the interests of other
stakeholders increasingly matter as well. Customers, regulators and government entities,
environmentalists, analysts, academia, financial journalists, the general public, and even
employees and associates - all these stakeholders can and will matter. The repercussions
when things go terribly wrong or even the negative publicity itself can easily destroy
hardwon reputation and franchise values that ultimately erode shareholder returns.
Now, most if not all will readily agree with the concept of good corporate governance. But the
conception of what is needed to be done is usually less obvious. To do that well requires the
"DNA" of a board to be capable of living to the mandate. In short, the composition of a board
will matter to its effective functioning. This is why our CG framework operates on a tiered
approach. The Companies Act sets out fundamental requirements for directors to act
honestly at all times and use reasonable diligence in discharging their duties. The Code of
Corporate Governance (or CG Code) for listed companies and MAS' requirements on board
directorship in local financial institutions, prescribe requirements relating to independent
directors, composition of board committees and so on.
One area that will need to be considered is in the area of board diversity. A more diverse
board is required not only out of political correctness but from good business sense. A board
that has a good mix of experiences, background and technical competencies will result in
more robust and thorough discussions and in decision-making by minimising blind spots or
information gaps. This will also reduce the risk of "management capture".
These observations quite understandably can trigger questions on whether it is time to
review our CG Code. It may indeed be timely to do so since the last review was back in
2012. Any review will need to carefully weigh the differing perspectives of different
stakeholders. What is needed is a balanced and progressive Code that not only serves to
enhance Singapore's CG standards, but is also pragmatic and workable in practice.
Corporate Disclosures
Good CG is also gaining priority in the minds of investors and other stakeholders.
Companies increasingly have to be more transparent and accountable to their stakeholders.
In the past year, the MAS has worked with market participants, including industry
associations, to improve the level of corporate disclosures in Singapore.
But high quality corporate disclosures continue to be a recurring concern for investors as
seen in some recent allegations of accounting irregularities against a few commodity-related
or energy resources firms. The bugbear is that investors looking to analyse financial
information put out by companies may feel hampered in doing so.
In a study1 commissioned by the Accounting and Corporate Regulatory Authority (ACRA) and
the Institute of Singapore Chartered Accountants (ISCA), most investors found that the
usefulness of a company's financial statements is often limited by over-aggregation of
information, insufficient disclosures and disclosures that are difficult to understand.
These findings suggest that companies can do more in providing simple and succinct
financial disclosures. In this regard, audit committees and directors also have a role in
ensuring that financial disclosures of their companies are sufficient, timely and meaningful.
The CG Code sets out the principles along four areas on: (1) board matters; (2) remuneration
matters; (3) accountability and audit; and (4) shareholder rights and responsibilities; where
companies should provide meaningful disclosures, and not merely adopt a box-ticking
mentality.
Two months ago, SGX issued a report that examined the presence and quality of disclosures
in relation to the CG Code. The findings indicate that disclosures, while generally adequate,
have room for improvement. One area, in my view, is for companies to provide better
disclosures on remuneration, as well as the link between remuneration and performance.
Another area is on more clarity with regard to diversity policies and the company's plans on
them.
The SGX has also announced that all listed companies will have to publish a sustainability
report from the financial year ending on or after 31 Dec 2017. Companies should disclose
material environmental, social and governance (ESG) factors, their policies, practices,
performance and targets. Overall, this marks progress from the voluntary reporting that has
been in place since 2011, in keeping with growing international interest in sustainability
information.
Market Discipline: A Collaborative Effort by All Stakeholders
Next, let me touch on market discipline and its important place in good CG practices.
There is a trend towards greater involvement and engagement by different stakeholders -
internationally and in Singapore. Take for example the recent debates on whether to allow
dual-class shares for SGX-listed companies. Stakeholders are understandably divided over
the implications of such a move and the potential impact on market discipline - and some
have advocated for the MAS to weigh in on the matter. That in my view, will prevent a
thorough debate and may prematurely stifle the broader collective wisdom of different
stakeholders. The SGX is still considering the possible safeguards so as to satisfy itself that
it can meet any regulatory concerns; and should it proceed, will issue a public consultation
document on the details.
For market discipline to work, directors should embrace a culture of quality disclosure and to
be forthcoming in engaging investors in a timely fashion. Responsible investors, on the other
hand, should also practise active stewardship - to question and to provide feedback. Active
involvement by all relevant stakeholders can contribute towards the vibrancy and confidence
in Singapore's capital markets.
But market discipline also requires a discipline in the market. Whenever we see allegations
and counter-allegations against companies in the marketplace, we should distinguish the
ones that reflect different stakeholder opinions to shape better or desirable outcomes from
the ones out to create mischief and corporate havoc without basis. The former should be
embraced as a positive manifestation of market discipline at work while the latter should see
the culprits taken to task via enforcement or supervisory actions.
Exercising Market Discipline through Investor Stewardship
This brings me to the related area of good stewardship which I briefly mentioned earlier.
Internationally, there is growing recognition that shareholders, particularly institutional
investors, should exercise a stewardship role, by engaging their investee company's board
and management towards long-term sustainability goals. On this note, MAS is pleased to
support an ongoing effort by the investment community to collaborate on developing a set of
best practices to promote active stewardship by institutional investors.
The MAS has also been supporting other stakeholders such as SIAS. One example is SIAS'
recent initiative to issue reports relating to company annual reports and to publish issues
notes to guide retail investors in their participation at company AGMs. SIAS has issued 25
such reports thus far and I note that some companies have taken efforts to provide written
responses to the questions raised.
Another worthwhile recent initiative by SIAS is the garnering of companies' affirmation
through the Statement of Support on their commitment to uphold and advance excellence in
CG standards to enhance shareholder value. I am told that already, 112 companies have
participated in support of the initiative - a very positive start.
Conclusion
In conclusion, the CG landscape is an evolving one but its fundamental tenet remains
unchanged - which is the accountability of the board of directors to their shareholders
specifically and also to other stakeholders at large. Board of directors should set the tone
from the top, and to walk the talk so that there is resonance from the tone in the middle and
tone at the front business units. Good governance must be guided by both doing "right" and
doing "good" - and thereby doing well for the companies over the long term. The MAS being
a financial regulator, and as one part of the CG eco-system, will continue to support a
collaborative effort in shaping our corporate governance landscape.
May I wish all of you fruitful discussions in the week ahead.
1
"Into the Minds of Investors: Investors' Views of Financial Reporting, Audit and Corporate
Governance" by ACRA, ISCA and National University of Singapore Business School.