Corporate governance gripes may fade if chronic undervaluation of stocks is addressed

THIS column received a lot of feedback when it said three weeks ago that Singapore is losing listings because the market has performed poorly, and many stocks are trading at low valuations.

Nobody disagreed, of course. The weak long-term performance of the Straits Times Index is obvious, and the trend of Singapore companies, large and small, choosing to list overseas continues to make headlines – and even drew a question in Parliament last month.

Yet, readers of this column had varying theories on why Singapore stocks have not delivered better returns, and differing views on what it may take to restore the vibrancy of the local market.

Some readers naturally look to the Singapore Exchange (SGX) and the local market ecosystem for solutions, such as fostering a more conducive environment for price discovery – especially for mid-sized and small-cap stocks.

One reader felt that the cost of gaining and maintaining a listing in Singapore might be a factor too.

It was also suggested that the bourse operator has more to gain by focusing on its derivatives business. For its financial year ended Jun 30, SGX’s cash equities business accounted for only 29 per cent of its total revenue.

Last year, SGX’s then-chairman Kwa Chong Seng made headlines when he said the local market faced tough competition for new listings and should focus instead on building up its currencies and commodities businesses.

There was also feedback about the quality of some companies that have come to market over the past couple of years. For value investors of the Benjamin Graham school, recently listed companies such as NoonTalk Media and Sheffield Green are just not worthwhile prospects.

Then, there were readers who felt that waning corporate governance standards might be deterring investors from participating in the local market, resulting in depressed valuations across the board.

Corporate governance means different things to different people, though. While regulators and experts in the field often focus on the minutiae of rules and controls that guide the behaviour of companies, ordinary investors often react to the behaviour itself.

Hence, lowball privatisation deals and value-destroying capital raising exercises – even when they check all the boxes – tend to be viewed by investors as a reflection of poor governance and sometimes cast doubt on the supposed independence of independent directors (IDs).

Technology disruption

My own view is that the long-term underperformance of the Singapore market is a multifaceted issue, and not driven by weakening corporate governance alone.

Shifting macroeconomic conditions – including the precipitous fall in oil prices in 2014 – have negatively affected the Singapore market’s performance over the past decade.

More importantly perhaps, traditional industries in Singapore – such as transport, retailing and media – faced technological disruption. With the rise of artificial intelligence, there may yet be further disruption in the years ahead.

On the other hand, it has become increasingly easy for investors in Singapore to gain exposure to companies in the US market that are on the right side of this technological disruption.

Today, the so-called Magnificent Seven mega-cap, technology-oriented stocks – comprising Apple, Alphabet, Microsoft, Amazon, Tesla, Meta Platforms and Nvidia – are arguably drawing liquidity away from equity markets around the world.

Where does corporate governance fit into this picture?

The way I see it, companies that fail to garner decent market valuations may become less inclined over time to meet the obligations of their public-listed status. If there is no upside to being listed, companies will naturally begin to resent the cost and effort of maintaining their listings.

Persistently weak valuations in some segments of the market have also resulted in the misalignment of interests between controlling shareholders and minority investors.

Instead of working to increase the market value of their companies, controlling shareholders now often end up trying to squeeze minority investors out with lowball offers.

And when these controlling shareholders succeed, minority investors are left doubting the effectiveness of the rules that are supposed to protect their interests.

Emulate Japan

There is, of course, room to push for more protection for minority investors.

This column has suggested in the past that market regulators require real estate companies to be priced at a minimum of their book value in take-private deals.

SGX also recently set a hard term limit of nine years for IDs, a move that is expected to promote board renewal and greater independence among IDs.

Yet, if depressed valuations in some segments of the market are contributing to widespread angst about corporate governance, then it makes sense to simultaneously introduce measures to boost the local market.

The way I see it, depressed stock valuations are not just a reflection of a lack of investor enthusiasm.

For instance, much is often said about property groups such as City Developments and UOL Group trading at stubbornly big discounts to their revalued net asset values; but rather less is said about the fact that their returns on equity declined steadily during the decade leading up to 2019, before the Covid-19 chaos began unfolding.

The point is that companies have to give investors a good reason to own their shares. Corporate groups such as CapitaLand, Keppel Corp and Sembcorp Industries have unlocked billions of dollars in value in recent years by restructuring themselves and concentrating on their most promising businesses.

This column suggested earlier this year that SGX take a leaf from the Tokyo Stock Exchange, which is pushing companies trading below book value to come up with plans to unlock the value of the shares.

The move has reportedly helped drive the recovery in the Japanese market, and even sparked the launch of a new exchange traded fund that is focused on stocks trading below book value.

If SGX managed to create a similar buzz in the local market, the interests of controlling shareholders and minority investors might naturally realign and some of the persistent grouses about corporate governance might gradually fade.

A more vibrant market with a healthy culture of risk-taking and speculation might begin attracting higher quality listings too.

The Mark To Market column will take a break next week while the writer clears some leave