SGX takes carrot and stick approach to set good corporate behaviour

Singapore

CARROT and stick - that's how the Singapore Exchange (SGX) will shape and deal with the corporate behaviour of listed companies here.

Outlining this to directors at a closed-door seminar organised by SGX and Sias (Securities Investors Association Singapore), Tan Boon Gin, chief executive officer of SGX Regulation (SGX RegCo), said SGX will not take a one-size-fits-all approach in regulating the close to 750 companies listed on the exchange.

"We simply can't because companies can be very different in the way they comply with our listing rules, or even with the law," Mr Tan said.

SGX's "tiering" approach will see well-behaving companies put on the "fast track" list, allowing for instance faster processing of market actions, while errant companies will face the full force of regulatory scrutiny.

"How we 'tier' companies determines what we do when it comes to our role as the front-line regulator," he said.

In dealing with what it categorised as tier-3 companies - the most notorious, where criminal behaviour has taken place, or where some form of fraud or other is taking place - SGX will look into whether or not any wrongdoing extends all the way back to the initial public offer (IPO).

If the issue managers have fallen short of SGX's standards in the listing process, action can be taken against them. This include barring the issue manager from the securities market.

The market regulator's role is also to investigate whether the criminal wrongdoing should have been detected earlier.

"If the auditors are not doing their job, we need to refer them to their regulators, to the Institute of Singapore Chartered Accountants (ISCA) and Accounting and Corporate Regulatory Authority (ACRA) so that the individual or the firm respectively can be held accountable. If they, the regulators, make findings against an auditor, we may even bar the auditor from our securities market," Mr Tan said.

While there is a chain of accountability in place to deal with malfeasance, the legal power to investigate crime lies with law enforcement agencies. Once a criminal behaviour is identified, law enforcement agencies, including the police, will step in.

"These are the agencies which have the necessary legal powers to investigate crime, to raid premises, seize documents and equipment, arrest the parties involved, and at the end of the day, seek the appropriate punishment such as imprisonment and other heavy penalties for the guilty parties.

"In short, these agencies have legal powers above and beyond SGX as a market regulator. They will therefore lead any investigation to be taken against the wrong-doers," he said. "So where fraud, bribery and other forms of financial crimes are suspected, or have occurred, it's the law enforcement agencies that have the primary role in investigation and accountability."

In dealing with tier-2 companies - those which may not have committed any fraud but are more cavalier when it comes to complying with SGX's Listing Rules - SGX will take the lead.

"If it is something that falls squarely within our listing rules, it is fair to expect SGX, as the owner of the Listing Rules, to take the lead in investigation and accountability," Mr Tan said.

"Recalcitrant companies and directors should expect no reprieve until they get their act together. We also have new disciplinary committees and powers to hold such companies and directors accountable."

As for the tier-1 companies, the law-abiding or rule-compliant group, SGX offers regulatory "carrots" like its latest fast-track initiative, which offers faster time-to-market processing corporate actions, among others.

Market players generally were positive on SGX's tiered approach.

Associate Professor Lawrence Loh, director of the Centre of Governance, Institutions and Organisations of the NUS Business School, said the fast-track list is "a strong first step to recognising the good performers in corporate governance".

"It will be good if we also work on getting stakeholders, particularly investors, to attach a premium on companies on this fast-track list," he suggested.

Stefanie Yuen Thio, joint managing partner at TSMP Law Corporation, felt that getting onto the fast track list should not be the end-game.

"Listed companies should strive for excellence in governance, and let the fast track regulatory carrot be the reward. That way, we improve the overall corporate governance of SGX-listed companies and lift the entire market," Ms Thio said.

On SGX's regulatory system, she stressed that "regulatory carrots must co-exist in an ecosystem where there is ease and speed of enforcement against recalcitrants".

"Currently the SGX's arsenal against the listed 'bad boys' are blunt instruments. The Companies Act makes it difficult and prohibitively expensive for minority shareholders to take up arms against mismanaging directors. Furthermore, severe enforcement action - which can only be taken by the government bodies - is long drawn.

"We need to re-look at the entire system and make sure that these 'bad boys' are being held to account quickly and effectively, by both the regulators as well as shareholders," Ms Thio said.