Putting board directors at the forefront of enhancing shareholder value

UNCERTAINTY over geopolitics, interest rates and economic factors has made many of us less sanguine than before. While the US markets roar ahead – or perhaps because they are doing so – most other markets have witnessed fewer initial public offerings and more delistings, lower valuations and less liquidity.

Singapore is no different, and new directors are about to enter the maelstrom.

Rather than debating why the Singapore market is where it is, I will discuss what we can do, have done and will do to improve our market. We, at the Singapore Exchange Regulation (SGX RegCo), call this the “value focus” approach because our efforts are centred on enhancing shareholder value.

Our value focus approach has three prongs. The first is market discipline. We must nurture, encourage and enable market discipline, in order to drive shareholder value creation.

At the heart of effective market discipline is the active investor: a shareholder who is prepared to ask the difficult questions, requisition meetings to compel change, and vote with both hands and wallet to hold companies and boards accountable.

At SGX RegCo, we believe that more active investors and effective market discipline will encourage our companies to improve their operational performance and shareholder returns. This is why we proposed in April to make it easier for shareholders to call for general meetings.

We are heartened by the feedback we have received; people generally agree that shareholders should be able to put important issues such as a change of directors to a vote.

We also intend to work with industry partners on other ways to empower shareholders. The Securities Investors Association (Singapore), or Sias, is studying the possibility of posing additional questions to boards of undervalued companies on their plans to improve valuations. We support this and encourage companies to respond meaningfully and comprehensively.

Active investors and market discipline must also play their part to acknowledge and send positive price signals to reward companies and boards that improve shareholder value. Indeed, we may start seeing corporate awards recognising such efforts as early as this awards season.

Smoothing the way

The second prong of the value focus approach is reducing market friction.

Some market participants have told us that our trading queries may affect the ability of companies to conduct value focus activities such as share buybacks.

We have thus launched a review of the queries posed to listed companies, looking at both when and how these happen. We want a more judicious balance between our role in ensuring the disclosure of material information, and the role of the market in price discovery and correction through uninterrupted trading.

This is in addition to the steps we have already taken to fine-tune our queries on unusual trading activity, and to make them more targeted. This has led to a decrease in such queries issued in the last half-year.

I understand that companies are often reluctant to engage with analysts, reporters and investors because they want to avoid accusations of selective disclosure or drawing unwelcome SGX RegCo queries if any forward-looking statement is published.

We believe that any doubt about selective disclosure is easily solved: Anything of material significance shared at an analyst or media briefing or investor roadshow should be put on SGXNet at the same time, so that the playing field is level.

We have also received requests for clear safe-harbour guidelines for companies making forward-looking statements. Some guidance is already available, though we are open to feedback on how to refresh or add to this to help issuers feel more confident in making decision-useful disclosures.

By making this explicit, I hope to see more companies step up their investor relations activities.

Fresh blood, fresh ideas

The third and final prong of the value focus approach is ensuring that our companies have high-quality boards. Shareholder value creation starts with the board.

Our theory is that new directors and independent directors will bring fresh ideas to the table. They will be less wedded to legacy businesses. A more diverse boardroom means more varied views and better decision-making. It will also likely be more open to opportunities in new areas such as sustainability.

We are so convinced by this that we made two big policy changes recently: a nine-year limit on the tenure of independent directors, and the requirement for companies to disclose a board diversity policy, including targets.

Consequently, two-thirds of directors appointed by the top 100 companies in Singapore in 2023 were first-timers, up from 47 per cent in 2022, according to the Council for Board Diversity.

To be or not to be Japan

This January, I attended a Coldplay concert in Singapore. Fans were given LED wristbands which lit up during the concert, and encouraged to return these for recycling afterwards.

The share of LED bands returned in each city of the tour flashed on a leader board. When I saw Singapore with 92 per cent of LED bands returned, I thought we must be on top. Then I saw Japan – at 97 per cent!

I mention this because I am often asked how our “value focus” approach compares with the “value up” approach of the Japanese securities regulators.

The Japanese have taken a much more prescriptive approach and are putting a lot more direct pressure on boards. For example, companies must disclose plans to improve capital efficiency, return on equity, and price-to-book ratios. Those which fail to do so are effectively “named and shamed”.

Yes, the stock market is undoubtedly big in Japan. But as I illustrated, the Japanese culture is not ordinary, and the revival of the country’s market has been a long time coming.

Many reforms were introduced years ago but have received much more attention in recent months due to tailwinds including a weak yen, relatively low interest rates and the so-called Warren Buffett Effect, with the market following the legendary investor’s lead.

So, should we apply the same pressure and prescriptive approach taken by Japan?

There are any number of ways our companies can unlock value: mergers and acquisitions, divestments or asset recycling, or committing to a dividend policy.

To their credit, companies such as Keppel, Singtel and Singapore Post have conducted strategic reviews and taken steps to generate greater shareholder value. Others such as CapitaLand Investment, OCBC and Sembcorp Industries are also delivering returns through share buybacks. This is in addition to the plethora of companies paying out dividends.

Promisingly, our market has shown it does reward companies seeking to increase shareholder value.

To new directors, I would like to issue this challenge. Don’t wait for us to be as prescriptive as Japan before you act. Prove that fresh blood is enough to transform stale companies into those with the “big ambitions” that The Business Times recently suggested are needed by Singapore’s stock market.

The writer is chief executive officer of SGX RegCo. This is an abridged version of a speech he delivered on Jul 30 at the launch of the Institute of Singapore Chartered Accountants’ Board of Directors’ Masterclass.