Taking corporate governance to the next level
NEWS that the Singapore Governance and Transparency Index (SGTI) climbed to a new all-time high this year is welcome, given the challenges faced by regulators over the years in ensuring a smooth transition from a merit-based regulatory framework to one based on disclosure.
According to data released earlier this month (August) by the SGTI’s keepers CPA Australia, NUS Business School’s Centre for Governance and Sustainability, and the Singapore Institute of Directors, the index’s mean score in the general category rose above 70 for the first time to 70.6, up from the previous high of 68.7 last year. This suggests that companies are slowly getting their act together in areas such as shareholder engagement as well as timeliness, accessibility and transparency of their financial disclosures. All of this is well and good, but the big question of course is -- how to maintain the upward momentum and take things to the next level?
The shift away from a merit-based regime came about after a government-appointed Corporate Finance Committee (CFC) in 1998 recommended installing a disclosure-based regime so as to foster a market-driven environment that was hoped would “promote innovation, entrepreneurship, efficiency and business flexibility while protecting the integrity of the securities market’’. It would be fair to say that the shift has not been seamless and today, more than 20 years later, some critics still see the current arrangement as sub-optimal. As such, it would be timely to remind ourselves of the committee’s key recommendations, starting with the need for a high standard of disclosure.
In this regard, the local market’s track record has been inconsistent. Larger firms tend to fare better because they have bigger and more diverse boards, in-house investor relations functions and institutional shareholders. Smaller firms though, tend to fall short – especially when it comes to complying with the spirit of the Code of Corporate Governance.
A good example is the breathtaking indifference with which some firms treat remuneration disclosure. Despite the Code demanding full transparency, many small firms are opaque when it comes to the salaries of top management, resorting to reporting in bands. To meet the “comply or explain’’ requirement, the dubious claim is made that revealing management’s remuneration in detail could lead to talent being poached by competitors.
To address this, it is worth noting a second CFC observation: “A disclosure-based regulatory regime will work effectively only if there is a strong regulatory framework to protect the integrity of the securities market…to raise the standard of disclosure, increase the transparency and certainty of rules and provide remedies for enforcement.”
As it stands today, swift and firm disciplinary action against errant companies and individuals could be better. Investigations often take years to complete and by the time action is finally taken, the original transgressions could already have been forgotten. Meanwhile, unlike other jurisdictions, public censures of companies and directors are rare, whilst compliance with the Code is selective.
In a caveat emptor market where there is no legal recourse for small shareholders, it is essential that regulators instil discipline by taking strong, firm and swift action when necessary. Doing so will ensure governance standards are constantly nudged upwards whilst simultaneously strengthening confidence in the local financial market. The latest SGTI study may indicate that governance is improving but more should be done on the regulatory front to take it to the next level.
