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Taking a long-term view
OUR capital markets ecosystem is akin to a natural ecosystem. Remove, neglect, harm or weaken one part of the ecosystem, and its sustainability is threatened. The greater the biodiversity, the healthier and more stable is the ecosystem. Just like how climate change is a threat to the natural ecosystem, a key stress facing our ecosystem is polarisation. Across the world, societies have become politically and socially fragmented; populism continues to rise, and individual interests rule.
The effects of polarisation can be seen in the capital markets, partly driven by technology. The tech revolution has not only empowered us, but has also caused divergence in the way that consumers behave, how supply chains work, and how businesses are run.
The uneven distribution of data, knowledge and capital has led to further market fragmentation. Trust in the capital markets is also eroded when companies run into financial difficulties, not always because of fraud, but perhaps due to tougher business environments or overly aggressive business decisions.
Against this backdrop, how can we foster a sustainable capital markets ecosystem?
Firstly, over-regulating may cause more harm than good. As the ecosystem evolves with new players, models and stresses, there have been calls for more rules and tighter regulation.
However, more rules will not make a better market, because regulation is not the answer to everything. When it comes to rules, quality is more important than quantity.
At its crux, the purpose of a marketplace is to facilitate the exchange of capital in a way that allows people to buy and sell into assets and ideas, and in the process, for economies to flourish. It is the job of the exchange to do this efficiently on a trusted platform. It is in this context that regulation plays a role.
An efficient marketplace requires both self-discipline and market discipline. In this regard, everyone needs to contribute - regulators, market professionals, intermediaries, commentators, investors and the media.
As a multi-asset exchange operating a global marketplace, it is not possible to perfectly balance the diverse needs and interests of a large number of international and domestic players.
There will be those who insist on more regulation because a desktop analysis of the numbers say so. On the other end of the spectrum, businesses want fewer rules so as not to hinder innovation and to encourage agility. Either way, an academic exercise of reviewing regulations could be interesting intellectually, but is limited in its real-life viability. More finesse is required to operate a market; regulation is an important tool but you need the whole toolbox.
There is also the question of proactive intervention by regulators and authorities in potential company issues - when and how should it be done? To what extent would an interventionist approach add value or harm the ecosystem?
We can and will put in place mechanisms to raise the standard of governance. But at the same time, taking personal responsibility is just as crucial in a disclosure-based market. No set of rules can replace this. Singapore is global, open, liberalised and market-driven - it is critical that we stay this way.
What will ensure a sustainable ecosystem is a shared understanding among stakeholders who recognise that their actions, or non-actions, can have ripple effects in the ecosystem.
Secondly, we must harness technology in a responsible manner. Technology is a double-edged sword - on one hand, it has partly caused markets to fragment; on the other, it offers opportunities for us to decipher and capitalise on the fragmentation.
The investing world is very different today. You can trade the world, across multiple products and currencies, on your mobile. Robo-advisers are increasingly common. Information flows will get faster, broader and deeper.
I like to ask young people: will you invest and how will you invest? Sometimes they say that they do not want to invest at all, or will only invest in environmental, social and governance (ESG) related instruments. Or that they wished that investing can be like online shopping, where you can return the goods and get a refund. Their replies could well be an indication of what we need to plan for.
Over the years, SGX has taken the multi-asset path because we see the need to support our clients in offering comprehensive risk management and trading solutions in Asia. SGX is harnessing technology and data to enhance our products and platforms, which means more choices and better experiences for our clients.
Going hand-in-hand with this is capital raising for growth. Well-functioning capital markets should provide companies with a venue to raise capital cost-efficiently, while ensuring sustainable returns for investors. Technology is changing the fundraising equation, and SGX is capitalising on this. One example of how we are providing more options for companies at every stage of fundraising is our investment in 1exchange (1X), the world's first regulated private securities exchange built on a public blockchain.
While we get excited about the "what" and "how" of technology, we should not forget the "why". We need to build digital systems which are inclusive, trustworthy and sustainable. It is human-centred technology, combined with appropriate standards and regulation, which will ensure that what we develop will have a positive, long-lasting impact into the future.
Finally, we are all accountable to each other. An ecosystem is sustainable only if its participants recognise their interdependency, and understand their respective roles. While it is not possible to completely align everyone's interests, it is possible to find a "centre of gravity" that everyone can gravitate towards.
I believe it starts with company boards. Board directors are stewards of their companies' assets. They set the strategic direction for their companies, and their actions probably have the greatest impact on shareholders.
Boards need to think of growing company value and passing it to the next generation of shareholders. This also means making business decisions whose benefits may sometimes not be immediately apparent or are unpopular.
The role of the board, its composition and governance are familiar to many. Rules have been progressively adjusted to enhance independence and inject greater professional competence and diversity into boards.
While governance frameworks are essential, it ultimately boils down to directors remembering their basic duty. They are tasked to look after the interests of the companies under their watch, as well as the interests of the public who have provided capital. Hence, boards should be held accountable to shareholders if they have not carried out their duties responsibly.
Boards should also be the primary drivers of corporate conduct and practise frequent shareholder engagement. Proactive and open communication on how the companies are governed, demonstrating independence of thought and robustness of decision-making, will go a long way in strengthening investor confidence.
A common interest for everyone in the ecosystem is investor education and protection. SGX is one of the players responsible for educating investors, while SGX RegCo protects the interests of investors within its ambit as a regulator of listed companies. This responsibility is also shared between financial intermediaries and market professionals, just to name a few.
When there are corporate failures, it is easy to point to policies and people that led to the problems. Financial intermediaries are often the public's main point of contact. While intermediaries have to act in their customers' best interests, they cannot guarantee the success of their recommendations. In fact, no entity or regulator can fully protect investors against financial loss.
Hence, shareholders need to be fully conversant with their investments. They have to understand the companies that they have invested in, and the industries that they operate in. When controversial proposals are presented by their companies, they should hold their boards to task, and raise the right questions at shareholder meetings.
A sustainable ecosystem requires investors to take charge of their personal investments and literacy. Investors should equip themselves with financial understanding and be able to assess the risks and rewards of any investment. The best investor protection tool is financial education, and with it, a diversification strategy.
In conclusion, the future of a sustainable, healthy capital markets ecosystem is in our hands. A sustainable ecosystem is one that thrives on right-size regulation, responsible use of technology, and willingness from everyone in the ecosystem to take ownership.
It requires, among many things, that we take a long-term view of each other's interests, forge mutually-beneficial relationships and consider the greater good. I hope we will all ponder over this, as we consider the future of investing.
- The writer is CEO of Singapore Exchange.
This is adapted from his speech "The Future of Investing - A Sustainable Perspective" at the SIAS Master Series Investment Conference on July 11.