Comply or explain issue: try naming & shaming

WHEN it comes to certain aspects of corporate governance, the principle of self-regulation does not seem to have worked out all that well here.

As the Singapore Exchange's new chief regulatory officer Tan Boon Gin said last week, some listed companies still fail to meet a bourse rule to either comply with the local Code of Corporate Governance or explain why they do not. The SGX now plans to carry out a review of more than 550 mainboard-listed firms to check whether they "comply or explain" and engage errant firms one-on-one.

This review is much needed and will no doubt benefit the local market, particularly retail investors who may not have the ability or resources to do something similar themselves.

But there are two major factors that suggest that it alone may not be enough to get errant firms to provide disclosures that are meaningful for investors. For that to happen, further steps may be needed to prevent firms from being able to make a mockery of the "comply or explain" requirement.

The first is simply that this listing rule has been in place for so long that it would be surprising if there were listed companies here that truly do not know about it. The "comply or explain" listing rule was imposed more than 12 years ago, in January 2003.

Mr Tan did say that failures to adhere to "comply or explain" may have been caused by misconceptions or lack of awareness. Whether that is due to ignorance or ignoring is unknown, but both are equally bad.

It is likely that firms already listed before the start of 2003 were made aware of the rule by the bourse; if they were not told in 2003, they would still have had opportunities to hear about it over the next decade. Companies that debuted on the SGX after January 2003 have even less of an excuse, since presumably they would have read the prevailing listing rules before deciding to undergo the initial public offering process.

Thus, though some market participants have expressed concerns about a growing regulatory burden on firms that are already listed or may want to list, regulatory scrutiny now on the "comply or explain" rule should hardly be seen as an extra hassle.

If the "comply or explain" requirement does deter some firms from listing here, so be it - it is surely not too much to ask that companies seeking to tap public capital be willing to commit to minimum standards of corporate governance.

To be fair, the Code was updated quite recently and some firms may not have had the time to keep on top of the developments. The SGX was perhaps taking this into account when it said that it intended to publish the results of the review on an aggregated statistical basis and engage errant firms one-on-one, rather than publicly singling out any.

But here, the "comply or explain" listing rule risks being seen as easy to manoeuvre around.

This relates to the second major factor, which is that nothing prevents companies from furnishing an explanation for non-compliance that enlightens no one.

A listed company "must disclose any deviation from any aspect of the Code together with an appropriate explanation for such deviation in the annual report", according to listing rules, but it would be impractical to lay down a definition of "appropriate explanation" since the circumstances of each firm can vary widely.

This grey area means that it is entirely possible for firms to get away scot-free with opaque or even tautological explanations that would technically be within bounds.

The SGX did not say whether its review would also look at the quality of listed firms' explanations for deviating from the Code, but it is unlikely that the bourse would see this aspect as being under its purview. That means that retail investors will have to read firms' explanations and decide for themselves.

That could work well for markets with strong, active institutional investors that have the resources and sophistication to effectively track Code compliance. But it may not work out as efficiently in a market full of retail investors such as Singapore, as corporate watchers have pointed out.

Given that issuers have no incentive to provide more than a bare minimum of explanations - beyond what their own sense of responsibility would dictate - a more hardline approach by regulators could do a great deal to help level the playing field.

Though the SGX has promised to engage misbehaving firms, there's no guarantee that its well-meaning efforts, especially if done in private, can get such firms to embrace the spirit of the rule rather than just go through the motions.

Of course, retail investors should be encouraged to conduct their own assessments rather than be spoon-fed. But since the SGX will be getting data on which issuers have been trying to skirt the rule, it would be no skin off the bourse's back to share enough information - especially on firms that fall within the grey area - to help retail investors spend their time productively.

Naming and shaming, in this case, could help to make the review even more effective and boost transparency for all market participants.

READ MORE: Enforcing the comply or explain requirement