Raising governance standards of smaller firms for retail investors
This is also critical for small companies, for their long-term sustainability and for the health of Singapore’s broader capital market ecosystem
[SINGAPORE] According to the latest Securities Investors Association Singapore’s (Sias’) Singapore Corporate Governance Awards (SCGA) findings, although overall scores have increased, smaller companies show less improvements than their bigger counterparts.
This isn’t really surprising because the reality is that while the blue-chip firms such as those in the Straits Times Index (STI) have generally embraced governance reforms – driven by greater public scrutiny, the need to compete for international capital, analyst coverage, and institutional ownership – smaller companies often struggle to match these standards.
Limited resources, lean management teams, and a focus on survival rather than compliance mean that governance practices often take the back seat. Yet, improving governance among small companies is critical, both for their own long-term sustainability and for the health of Singapore’s broader capital market ecosystem.
Furthermore, given that the authorities are looking to stimulate interest in companies beyond the 30 components of the Straits Times Index (STI), it does beg the question – what can be done to raise governance standards among smaller firms to justify increased investor interest?
Why the gap exists
The reasons for the governance gap are multi-faceted and in some instances, structural, starting with the fact that small firms typically have fewer independent voices at the board level.
Instead, their boards tend to be dominated by founders, family members, or close associates, resulting in limited oversight and accountability. In many cases, the roles of chairman and chief executive are still combined, blurring the line between governance and management.
Second, compliance and governance are often seen as cost centres rather than value creators. Smaller companies often do not have in-house internal audit or investor relations functions, while the cost of engaging external consultants to provide these services or hiring experienced independent directors can seem prohibitive.
This leads to a “tick-the-box” mentality – complying only with the bare minimum required under SGX rules, rather than embracing governance as a strategic advantage.
Third, external policing – or the lack of it – plays a role. Larger companies are well covered by analysts and institutional investors who keep managements on their toes but smaller companies, by contrast, tend to be under-researched and thinly traded. With less public visibility, there is less market pressure to maintain high governance standards.
Finally, there is a cultural dimension. Many small business owners probably still regard their firms as extensions of their personal empires. Relinquishing control or inviting external scrutiny can feel uncomfortable, especially when governance is seen as interference rather than guidance.
Why governance matters
However, ignoring governance comes at a cost. Poor board oversight can lead to weak risk management, related-party transactions that raise red flags, or lapses in disclosure that erode investor trust and lead to share price underperformance.
Smaller firms should recognise that good governance can be a powerful differentiator. A company that demonstrates transparency, sound internal controls, and an independent-minded board can attract long-term investors and command a valuation premium.
Governance is not merely about compliance – it’s about building a framework for sustainable growth and resilience. The mindset that boards and management should seek to inculcate in their corporate culture is very simple: good governance means good business, resulting in better performance.
What can be done – everything starts at the top
To begin with, under the latest Equity Market Development Programme (EQDP) announcement, MAS will provide funding to train personnel within smaller listed companies who do not have an effective investor relations function to build more effective investor relationships through better communication initiatives. This is an admirable first step by the regulator to help generate interest beyond the blue chips. The ball is now in the court of these companies which badly need to tell their growth stories to investors.
Like any corporate initiative aimed at raising shareholder value, it is crucial that efforts to raise governance standards must start from the top, since it is the board that sets the tone for any major corporate strategy thrust.
A starting point would be for smaller firms with weak SCGA scores to recognise that they have a problem and that something needs to be done. Family-run boards for one, should try to ensure a strong professional and diverse element within their ranks while studying ways of replacing family members with individuals who are truly independent.
They should appoint only those who are accredited by the Singapore Institute of Directors, which would then provide the market with a baseline assurance of directorial competence.
Simplifying governance frameworks for SMEs
While the Singapore Code of Corporate Governance sets out best practices, many smaller listed firms find it daunting to fully satisfy all the requirements.
The authorities could consider developing a “proportionate governance code” – a simplified framework tailored to smaller firms that captures the spirit of governance without overburdening them with red tape.
In this regard, perhaps study should be given to the UK’s Quoted Companies Alliance’s (QCA’s) Code of Corporate Governance which is tailored for small-to-mid-sized companies and is used by almost 900 companies whose shares are traded on London’s AIM, the Main Market, the Aquis Stock Exchange and by private companies which may opt to float in the future.
Introduced in 2013, the QCA Code was revised in 2018 “to provide clear and practical guidance for small and medium-sized public companies and help them achieve sound corporate governance’’.
The QCA Code is a more flexible, principles-based framework designed for smaller firms, while the main UK Corporate Governance Code is a more prescriptive, “comply or explain” code aimed at larger companies with a premium listing.
The QCA Code is tailored to growth-focused businesses and allows for easier adaptation, whereas the UK Code is seen as more burdensome for smaller firms.
Making better use of the horse racing pages in The Straits Times
There is currently insufficient media coverage of small-to-mid-sized companies in the mainstream media. Furthermore, many are not covered by research analysts.
Instead, The Straits Times (ST) has two pages of coverage on horse racing almost every day even though the Kranji race course doesn’t exist any longer.
These pages focus on overseas races probably to facilitate online betting but surely they can be put to better use locally if they were sponsored by the Singapore Exchange and featured lesser-known, smaller companies? After all, surely, many retail investors would be interested in investing in good quality affordable penny stocks?
These could take the form of corporate profiles that include excerpts from annual reports. Where available, research reports by brokers could also accompany these profiles.
Once these companies become better known to the public and attract greater scrutiny, they would then have a natural incentive to raise their governance standards or lose out to their peers.
Incentivising good behaviour
The market should reward companies that demonstrate commitment to governance. Instead of focusing only on financial performance, broking firm analysts could start incorporating governance considerations into their investment recommendations.
After all, a well-governed firm would be less likely to fudge its numbers and more likely to produce financial statements that could be truly relied upon. Moreover, such firms would also be less likely to indulge in dubious, off-the-books transactions that would damage shareholder value.
Last but by no means least, broking firm reports are fundamentally aimed at alerting readers to companies worth investing in – or not.
Surely major determining factors should be the quality of the management, how well a company treats its shareholders and how transparent it is – which are all major governance considerations.
The writer is founder, president and CEO of Sias
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