Published January 16, 2009

Good governance needs more regulation, not less

By R SIVANITHY

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THE subject of good corporate governance has been in focus lately, with disclosure of stock options, executive pay, the role of independent directors and even the Singapore Exchange's dual duty as a regulator and commercial entity coming under scrutiny in BT's pages these past few weeks.

More recently, reader Tan Lye Huat in a letter to BT published on Jan 13 ('Improving corporate governance vital to regain confidence') wrote critically but accurately about the state of corporate governance in Singapore today, stating that studies have shown that while compliance with the form may look encouraging, substance is woefully absent and that companies basically go through the motions when it comes to practising governance.

No argument here - for instance, it's always been our contention that companies only practise 'good' disclosure in a bull market, and when things take a turn for the worse, all disclosure principles go out of the window. In other words, companies only pay lip service to the ideal of 'balanced' disclosure but don't really want to be open with their shareholders if the news is negative.

How then can governance be improved? Is there any point in belabouring the points that good governance is a state of mind and that companies should seize the initiative to be open and transparent because over time the market will reward their share prices?

Or is it time to admit that the disclosure-based model that regulators had been hoping to engineer needs serious tweaking?

We think the latter. Two years ago when the market was in full flight and the disclosure-driven, caveat emptor regime was supposedly functioning as well as could be hoped, a slew of listed firms announced profit-guaranteed deals, many involving outrageous earnings numbers and often with unknown foreign partners in far-flung locales. Were those deals genuine or simply works of imaginative fiction, dreamt up as aids to ramping up share prices?

We'll never know because none of those deals have materialised - most cancellations were due to the non-fulfilment of obscure legal clauses that were never highlighted in the first place - and since then, with the Singapore Exchange (SGX) having introduced regulations that essentially require greater disclosure if announcements involving profit guarantees, no new ones have been announced.

Real or contrived, it'd be fair to say that the bear market and added regulation has effectively put a stop to companies making dubious announcements.

If added regulation added discipline to an area in which it was sorely lacking, then another area which the exchange should look at is roadshows, or any forum in which listed companies plan to meet either the public or prospective investors, or both.

At the height of the bull market in 2006-2007, investors actually scrambled to obtain lists of companies scheduled to present their investment stories at conferences, roadshows or open houses hosted by various brokers because experience showed that stocks of those companies would almost always rise after the meetings ended.

This led to the ridiculous outcome where lists of companies participating in open houses became valuable, price-sensitive documents that were much sought after by punters. To avoid this and to level the playing field for all investors, the authorities should require all companies to first post all slides and presentation materials on the SGX's website before the scheduled event and not after, and to supplement this with added material if the actual presentation deviated from that planned.

The same should apply to analyst meetings - too often have we seen research reports in which the crux of the investment recommendation is information provided by the company's management at a private briefing, information which was most probably not available to average retail investors. Like investment sales pitches at roadshows, companies should be required to post details of their analyst meetings on the SGX's website as soon as possible, preferably before those analysts issue their reports.

There are many other areas which could do with more and not less regulation - for example, whether or not the research house issuing a recommendation had any financial relationship with the company being covered, something which is currently brushed aside on research reports via a disclaimer - but the point is actually simplicity itself, namely, to level the playing field for all investors and to ensure no one is unduly advantaged or disadvantaged.

If achieving this requires a revamp of the regulatory framework and the introduction of more regulation from the authorities, then so be it; as Mr Tan correctly stated in his letter, to leave it to free-market forces to evolve an effective governance framework is a pipe dream.