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Governance gap between S-chips and other stocks widening: study (Amended)

Divergence more notable from 2012, when revised Code of Corporate Governance was put in place



AMID new attention on the corporate governance of S-chips or China-focused stocks listed in Singapore, fresh data analysis shows a widening gap between governance standards of S-chips and the rest of the market, made up mainly of Singapore entities.

This comes as the Singapore Exchange (SGX) issued a terse warning earlier this month over tardy disclosures by companies with large operations in China.

The Exchange said there have been adverse and significant changes in the financial positions of such companies under "perplexing circumstances".

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In a speech on Tuesday, SGX's chief regulatory officer Tan Boon Gin also said the bourse is reviewing compliance with corporate governance rule among its listed companies. SGX will publish the results of such a review and highlight areas that include the unacceptable use of boiler-plate explanations.

S-chips have improved their governance standards over the years, but the problem is that the pace of improvement lags the rest of the listed companies.

The gap started widening more prominently from 2012, when Singapore companies started to raise standards to meet the revised Code of Corporate Governance. The Code isn't mandatory, but companies have to either comply or explain non-compliance.

Figures from the Centre for Governance, Institutions and Organisations at NUS Business School show that the average total score for all listed companies that are not S-chips on the Governance & Transparency Index (GTI) - which benchmarks governance standards in listed firms - stood at 48.8 out of a possible 143 points this year.

That isn't a great score, but for S-chips, this was even lower at 42.2. This translates to a 6.6-point difference. In the latest study, the centre looked at 110 S-chips and 529 non- S-chips. The gap has been widening since 2012. That year, the mean score for S-chips was 32.8 while the rest of the listed companies (mainly Singapore- domiciled companies) had a score of 35.4 - a difference of just 2.6 points then.

"The main worry for us is not just in the gap between the S-chips and non-S-chips. It is really in the widening gap, particularly over the past four years," said Lawrence Loh, director of the centre.

"In essence, the core differentiator between the two types of companies is disclosure. S-chips generally do not give the necessary attention to good disclosure."

But in the three years since the revised Code was put in place in 2012, other Singapore-listed firms have generally worked towards good governance practices, Prof Loh added.

As comparisons, none of the S-chips disclosed information on the succession planning of the board and senior management. Many non- S-chips didn't either - but at least the practice is picking up, with 4.3 per cent doing so, said Prof Loh. Just over 6 per cent of S-chips disclosed details of their code of conduct or ethics. This compared with 12.7 per cent of non-S-chips.

Beyond disclosure, only 2.7 per cent of S-chips have independent chairmen, compared to 17.2 per cent for non-S-chips.

Asked if the lack of regulatory reach to China plays a role, Prof Loh noted that non-S-chips, which are predominantly Singaporean companies, have local domiciles that are "within easy reach of regulators and key stakeholders".

"It is really in their integral interest to stay well up in governance and to be seen to be doing so," he said.

"The S-chips have a vastly different primary operating environment for their business. As China's economy has been faing uncertainties and challenges in the past few years, the emphasis on corporate governance has been less for these companies than for non-S-chips. The need and incentives to buck up on corporate governance for S-chips are less strong."

SGX did not name companies when it issued its caution on the disclosures of several companies with a large presence in China, but listed several examples of concern: some companies have reported customer claims for compensation of more than 10 times the value of the original sales, while others inflated trade receivables written off, and provided little clarity. Some made significant loans and advances to business associates, which were not part of the normal course of business. These debts were eventually deemed uncollectible and written off.

There were also others that made impairment provisions on their fixed assets such as factories and land on the basis that discounted cashflow from the business was impaired and the value-in-use negligible. "Some of these impairment decisions may be questionable. That these cases are surfacing at a time when China's economy is slowing and exports and imports declining may not be a coincidence," SGX said.

In the most recent governance issue involving an S-chip, a special audit conducted on Cedar Strategic Holdings, a Chinese property firm, on Tuesday showed that the company displayed numerous weaknesses and lapses in corporate governance, and internal controls. Cedar might have breached Catalist Board rules, too.

The special auditor, which was appointed by the Cedar board this year to conduct an independent review of the firm's accounts for financial years 2013 and 2014, also flagged questions over several divestments.


Amendment note:

In the earlier version, we wrongly identified the mean score for S-chips, and the score for non-S-chips for one set of comparison. We are sorry for the error.