LAST month, the Accounting and Corporate Regulatory Authority (ACRA), Institute of Singapore Chartered Accountants (ISCA) and the NUS Business School released a report on investors' views of financial reporting, audit and corporate governance, based on findings from a survey and focus group discussion conducted in April and May 2016.
A total of 33 institutional investors and 171 retail investors participated in the survey. Most of the retail investors who participated are members of the Securities Investors Association (Singapore) (SIAS), one of the organisations which supported the study.
In this article, we discuss some of the key findings from the study, particularly those relating to corporate governance.
Surprisingly, about a quarter of the institutional investors and 45 per cent of the retail investors do not read the corporate governance report in the annual report. It does seem that more experienced investors are more likely to read it. About 60 per cent of retail investors with 11 or more years of investment experience do so compared to just 48 per cent of those with 10 years or less of investment experience.
The fact that many investors do not read the corporate governance report is a cause of some concern. This may reflect scepticism about the value and veracity of the corporate governance report.
We would urge investors who are dissatisfied with the quality of disclosures or explanations in the corporate governance report to seek more information from companies at annual general meetings (AGMs) or one-to-one meetings. In order for the "comply or explain" approach adopted for the Code of Corporate Governance to work, it is important that investors play their part.
For example, as the Code now recommends that independent directors who have served more than nine years be subject to a "particularly rigorous review", many companies now include a boilerplate statement saying that they have done such a review.
One Catalist company recently paid a sponsor S$3,000 to do a "particularly rigorous review" of a long-serving independent director. In such circumstances, investors should query the companies on the details of the review. They should also ask the director to explain his contributions to the board and company and make their own assessment of the director's independence.
In the case involving Singapore Post, having an external consultant assist in a "particularly rigorous review" of the independence of three long-serving directors did not help in ensuring good corporate governance in the company.
Perhaps many investors do not read the corporate governance report because it is not subject to independent review by an external party - unlike the financial statements which are independently audited. When investors were asked about whether having independent assurance over the non-financial disclosures (including corporate governance) in the annual report would add value to the investor, bearing in mind the additional independent assurance costs to be borne by companies, there was some, but not overwhelming, support.
Among institutional investors, 45 per cent felt that independent assurance was important or very important and just as many felt that it was only somewhat important. About two-fifths of retail investors valued independent assurance as important or very important and half of them felt that it was somewhat important. It may be that doubts about the value of independent assurance done by a third party exist because such third parties are hand-picked and paid by the company, and hence may not be truly independent.
In assessing the quality of the corporate governance of a company, institutional investors said that they paid most attention to qualifications/experience of directors, remuneration of directors/senior management, number of independent directors, risk management and internal control, and audit committee-related matters. For retail investors, qualifications/experience of directors, remuneration of directors/senior management, and risk management and internal control were most important.
Overall, institutional investors place more importance on corporate governance factors based on the percentage of respondents rating such factors as important or very important.
This is also supported by the finding that while 70 per cent of the retail investors have not asked any questions relating to corporate governance at AGMs, only 20 per cent of institutional investors, who tend to rely on one-to-one meetings, have not done so. Remuneration, risk management and independence of directors are the most common type of questions related to corporate governance asked by retail investors. For institutional investors, the top issues raised are remuneration, independence of directors, competencies of directors, and risk management.
The high percentage of retail investors who have not asked questions about the corporate governance of companies is not surprising when we consider that 50 per cent of the retail investors who participated in the survey have not attended any AGMs. In contrast, only 6 per cent of institutional investors have not had one-to-one meetings and 55 per cent have more than 50 of such meetings a year.
However, there is hope in this regard. With the amendment in the Companies Act allowing indirect investors (including institutional investors and CPF investors) to be appointed as proxies and attend AGMs in Singapore, 47 per cent of retail investors said that they are more likely to attend AGMs, while another 33 per cent are more likely to attend AGMs where there are contentious issues. For institutional investors, where attendance at AGMs is not the main means of engagement with companies, 18 per cent are more likely to attend AGMs and 61 per cent are more likely to attend where there are contentious issues.
We would urge more investors to attend AGMs and ask questions about companies' corporate governance, financial statements, audits and other relevant areas, in order to hold directors accountable. On their part, regulators should continue to explore how to improve shareholder participation in AGMs, for example, by reducing clustering of AGMs. One possibility is to allow more time for companies to hold their AGMs while at the same time limiting the number of AGMs that can be held on a particular day.
With the enhanced auditor reporting standards applying to audits of financial statements beginning on or after Dec 15, 2016 and the new requirement for auditors to communicate key audit matters (KAMs) in the auditor's reports, together with the Audit Quality Indicators (AQIs) Disclosure Framework introduced by ACRA, investors should take advantage of these initiatives to ask more questions about the audit and how the audit committee evaluates and selects the auditor. Investors should also heed the Code's recommendation to ask the auditor questions about the conduct of the audit and the preparation of the auditor's report.
Improvements in corporate governance, financial reporting and audit should not be seen as the sole responsibility of regulators. Investors also cannot rely totally on directors to act in their best interest. By asking pertinent questions in a respectful manner, investors can hold directors accountable and help ensure good governance and high quality financial reporting in the companies they invest in.
- Mak Yuen Teen is an associate professor at the NUS Business School and led the study discussed in this article. Chew Yi Hong is an active investor who has been involved in several corporate governance research projects and was the research analyst for the study. The views in this article are the writers' personal views