Independence of Catalist sponsors crucial
IF a sponsor of a company listed on Singapore Exchange (SGX)'s Catalist board is effectively the first line of defence - or frontline regulator - then the sponsor's commercial and regulatory roles should be made distinct. Some form of role separation would help limit conflicts or perceptions of conflicts - as has been the case at SGX since it hived off its regulatory role from its commercial operations to create an independent SGX Regulation.
The reality for most corporates, of course, is that such a move would be hard to swallow given the impact on bottom lines. Nevertheless, some changes would be welcome.
Catalist sponsors already have to comply with some rules relating to independence and conflicts of interest. They are required to have adequate systems and resources, including controls, procedures and other safeguards, to maintain their independence and avoid conflicts of interest.
Yet, a study co-authored by associate professor Mak Yuen Teen of the National University of Singapore (NUS) Business School and Chew Yi Hong, an investor and researcher, highlighted that Catalist sponsors face conflicts as they often provide non-sponsor services to sponsored companies or have other business relationships with them. Such services may include financial advisory, corporate secretarial, share transfer agent, legal and so on, in some cases provided by affiliates of sponsors.
The concern is that sponsors may try to be friendly to companies they sponsor in order to win more engagements, undermining the effectiveness of their regulatory oversight. Sponsors may also be supportive of companies undertaking more transactions, including transactions that may not be in the interests of the company and minority shareholders, because they may stand to earn fees from acting as advisers for these transactions.
To be clear, conflict-of-interest dilemmas are not peculiar to Catalist. Hong Kong Exchanges and Clearing's sponsor regime too faced similar challenges. The exchange eventually split the roles of sponsor and underwriter.
Similar concerns have also been raised about nominated advisers (Nomads) on the Alternative Investment Market (AIM) in the United Kingdom. By carrying out their responsibilities to the exchange and reporting any malpractice, Nomads naturally run the risk of losing out on other fee-work from the listed company. Such a system often fails to bring companies to account and does not protect shareholders. The situation is also made more complicated where the Nomads also act as brokers and receive commission for the sums raised for the company.
The right balance
It may be time to consider a clearer framework governing sponsors' independence - perhaps something similar to those used to ensure auditors and bankers are as free as possible from factors that compromise their ability to make unbiased decisions.
For instance, there is a need to maintain effective Chinese walls to prevent flows of confidential information between corporate finance and other business departments. Sponsors must show they have a clear company policy governing the provision of, and the receipt of, benefits to and from issuers. They must also show that they have implemented tight internal control procedures for independence checks as well as corporate governance.
From the study, it is clear that most sponsors have non-sponsor related work. And the more companies they sponsor, the likelihood of non-sponsor-related jobs increases. But disclosure of work done is wanting, notably among the top sponsors.
Guidelines are needed for greater clarity in terms of the quantum of non-sponsored business done. The market must be given the assurance that a sponsor's regulatory standards will not be compromised and lowered because more money is flowing in from non-sponsor work. Given that continuing sponsor fees typically range from S$50,000 to S$100,000 per year, it is not surprising that fees for non-sponsor services can dwarf sponsor fees - as the study pointed out.
Certainly, there is no such thing as a perfect system. Chinese walls at auditors and banks do not always separate divisions effectively. Nevertheless, a more robust system of governance would help investors and issuers alike.
A June report published in Hong Kong provided supportive evidence that a sponsor's reputation does matter in explaining an initial public offer's (IPO) initial return and volatility. It also showed that sponsors with a bettter reputation tend to be those that break down the information asymmetry between issuers and investors. The more the investors know about the issuer, the more stable trading prices tend to be.
SGX has promised an inaugural report on "Findings and Recommendations on Continuing Sponsorship Work". It will be eagerly read for finer qualitative and quantitative demarcations of a sponsor's dos and don'ts.
