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Uplifting the governance of private companies

Privately held companies have grown in number over the past few years, even as publicly listed companies have declined. In conjunction with this trend, the incidence of corporate failures amongst private companies has risen, highlighting the urgency for a closer look at the standards of corporate governance in private markets.

The rise of private markets

The number of listed companies in Singapore has hovered around the 700s since its peak of 782 in 2010. Over the past five years, delistings have outnumbered listings on the Singapore Stock Exchange, and total market capitalisation of companies with a primary listing in Singapore fell by nearly S$100 billion or 14 per cent.

The shrinking volume of initial public offerings has corresponded with a rise in private equity. The number of companies registered in Singapore grew from 301,682 in January 2017 to 353,538 in December 2019, a rise of about 17 per cent. 

The 2020 edition of McKinsey’s Private Markets Annual Review revealed that globally, private market assets under management grew by 10 per cent in 2019 year on year, with the number of active private equity firms more than doubling in the past decade.

Sovereign wealth funds, private equity firms and international pension funds continue to increase their allocations to private ventures. With excess liquidity and capital available for private company investments, the attraction of a public listing has lost some of its lustre.

At the same time, there has been an upturn in corporate insolvencies, with 287 companies in liquidation and 406 applications filed for compulsory liquidation in 2019, the highest in decades.

In just the first three months of this year, there were already 239 companies going into liquidation, with the situation for the rest of the year likely to be exacerbated by the worsening coronavirus pandemic.

Homegrown names such as Five Star Tours, California Fitness, True Spa, Asia-Euro Holidays, Home-Fix and Honestbee have been forced to close, causing losses to employees, retail customers and other stakeholders. More recently, the distressed oil trader Hin Leong Trading entered into judicial management with a debt pile of some US$4 billion.

State of governance in private markets

Private companies benefit from limited liability status, and they are not subject to the same reporting requirements and accountability as publicly listed companies. Under Singapore laws, private companies are subject to fairly basic levels of compliance. 

For instance, while the Code of Corporate Governance is available to be adopted by all companies, it is mandatory only for listed companies. Moreover, it is relatively easy to incorporate and start a business, with no mandatory training or minimum qualifications for directors. 

Only major private companies that qualify as “public interest entities” are subject to additional audit and regulatory requirements. Yet, many large privately held companies have multiple investors and have an outsized social and business impact on the public, not unlike publicly listed companies.

The Financial Reporting Council of the UK acknowledges that: “just like public companies, if problems occur in large private companies, they can affect a wide range of stakeholders including customers, the workforce, pensioners, suppliers and the community”.

The Wates Principles

In the UK, the collapse of private company British Home Stores, which was a retail chain with 240 stores when it closed in 2016, led to thousands of employees losing not only their jobs but their pensions. The fallout from BHS led the British government to reconsider the status of limited liability and the lack of reporting and accountability requirements for private companies compared to publicly listed companies. 

In an effort to improve standards of corporate governance in private companies, the British  government introduced legislation in 2018 which required all companies of a significant size (more than 2,000 employees or a turnover of more than £200 million and a balance sheet of more than £2 billion), to publish a corporate governance statement in their annual report and website.

The Wates Corporate Governance Principles for Large Private Companies was accordingly launched in December 2018. 

The principles adopt the “apply and explain” approach, and companies are expected to apply the principles and provide a supporting statement that gives an understanding of how their corporate governance processes achieve the desired outcomes.

While recognising that private companies are not a homogeneous group, the principles focus on broad areas of purpose and leadership; board composition; director responsibilities; opportunity and risk; remuneration; and stakeholder relationships and engagement.

The way forward for Singapore 

A code similar to the Wates Principles could be a helpful framework for private enterprises here to increase their levels of accountability and transparency and be a tool for them win over public and stakeholder confidence in their businesses. After all, even the charities sector introduced a Code of Corporate Governance for Charities and Institutions of a Public Character as far back as 2007. 

With the growing number of notable corporate failures, it may be timely for the spotlight to be trained on Singapore’s larger private companies with a significant presence in the community, for them to be held to a higher level of corporate governance and to display more responsible business practices.

The writer is vice-chairman of the Singapore Institute of Directors.

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