Troubles they face apply to other small caps, emerging market stocks too
By LYNETTE KHOO AND OH BOON PING
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SINGAPORE-LISTED Chinese stocks, or S-chips, as the market calls them, should not be singled out as the problem child of the stock exchange.
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| Discussing tricky issues: The S-chip topic sparked an interesting and lively debate during the session which was moderated by Assoc Prof Mak Yuen Teen (standing), from the NUS Corporate Governance & Financial Reporting Centre |
The troubles facing them are not confined to the cluster, but also apply to other small caps and emerging market stocks. Others have simply fallen prey to dire economic circumstances.
But of course, there are still issues unique to this cluster given the difficulties posed by the language barrier, differences in business philosophy and culture, as well as regulatory constraints.
These points were raised at a Roundtable discussion on 'Will the well-governed S-chips please stand up?' jointly organised by The Business Times and the NUS Corporate Governance & Financial Reporting Centre last Friday.
The session saw 35 participants comprising auditors, legal advisors, investors, bankers, academics, independent directors and other senior industry professionals. Some regulators were present as observers.
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Yap Wai Ming, director at Stamford Law, noted that the problems facing S-chips are not peculiar to this group alone.
'There are American and Indian companies that are in trouble too. The problem that is unique to Chinese companies is mainly because of its culture and understanding of the rule of the law...and there will always be a disconnect between the management and the independent directors,' he said.
One area that needs bridging is the language gap. Singapore independent directors (IDs) tend to rely on translations during meetings with the Chinese management and some meanings may be lost in the process, Mr Yap said.
To begin with, IDs need to understand what is corporate governance, said Rohan Kamis, managing partner at Rohan Mah & Partners.
According to some roundtable participants who are directors of listed companies, certain IDs do not have such understanding.
Interestingly, the spate of accounting fraud during 2003-2006 largely involved Singapore companies in the likes of Citiraya and former Accord Customer Care Solutions (now known as MDR Ltd), observed Gautam Banerjee, executive chairman of PricewaterhouseCoopers.
Arguably, these cases have been dealt with by the law, while the enforcement over foreign listings is more tricky.
'How do you enforce or make them comply with Singapore rules? If you send people there, your truck goes missing or the people may go missing. There are a lot of things you can't do,' said Mr Yap.
He did not specify these cases, but one could draw references to recent allegations of China Sun IDs on a stolen truck containing accounting records - and the missing act of the husband-and-wife team at China Printing & Dyeing.
Some felt that penalties need to have more teeth in order to act as a strong deterrent against mismanagement or fraud.
'If the penalties for breaking rules are not harsh enough, not punitive enough, people will just do it,' said Kon Yin Tong, managing partner at Foo Kon Tan Grant Thornton. The accounting firm audits a number of S-chips, which make up one-third of its Singapore-listed clients.
Government-to-government cooperation is also needed to reach errant management based overseas. But some lawyers present noted that most S-chips here are red chip listings that skirted the screening of China Securities Regulatory Commission (CSRC) by restructuring and incorporating outside China. It may hence be hard to seek CSRC enforcement on them now.
Marcus Chow, director at Drew & Napier noted that Hong Kong had the same issue with Chinese listings for a long time but that is alleviated given greater level of cooperation from the CSRC now on regulatory issues.
If such reciprocity could be extended by CSRC in spirit to Singapore pursuant to the multilateral MOU (MMoU) under the International Organization of Securities Commissions (IOSCO), there could be greater enforceability of Singapore rules on errant S-chips and Chinese directors in China, he said.
Elaine Lim, managing director of Citigate Dewe Rogerson I.MAGE, suggested appointing a legal representative for each foreign listing to facilitate enforcement or disciplinary actions, as in the case of the Hong Kong stock exchange. She felt that regulatory scrutiny post-listing has fallen short.
Other suggestions also leaned towards regulatory tightening, including a review of the rule book and code of corporate governance, and re-defining SGX's role as a regulator.
But participants also stressed that it is a delicate balancing act. There is also the risk that companies find listing obligations too onerous and decide to list elsewhere, said Kathy Zhang, managing director of Financial PR.
Others took issue with the aggressive push for IPOs by deal makers and issue managers, neglecting quality in the process. The performance bar of all professionals involved in the IPO process needs to be raised, said Stefanie Yuen-Thio, joint managing director of TSMP Law Corporation.
There were also calls for more education on corporate governance to S-chips, and having a financial sector development fund to help finance such efforts and pay for good IDs.
A common trait among S-chips is that the controlling shareholder is both the CEO and chairman, and 'whatever he says, it goes,' said Ms Lim of Citigate.
'There is a change of status from private company to public company but there is no change in the way of doing things,' Ms Lim added. That mentality, she felt, has to change.
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