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Corporate governance failings put SGX on brink of 'death spiral'

Slew of Singapore-listed companies called out for questionable standards

SGX Limited said it issued nine notices of compliance in the 12 months to June 30, and further three notices in the quarter ended Sept. 30.   © Reuters

SINGAPORE -- Lax corporate governance and poor enterprise management of public companies listed on the Singapore stock exchange has put SGX, operator of the bourse, on the verge of terminal decline, according to a leading accounting expert.

Professor Mak Yuen Teen, an associate professor of accounting at the National University of Singapore Business School and founder of Singapore's first corporate governance center, said the current run of poor listings is creating a vicious cycle.

"I think we are almost in a death spiral," Mak told the Nikkei Asian Review. "You don't enforce, so you don't attract very good companies, then you attract not-very-good directors and the quality of companies keeps falling."

The World Economic Forum recently ranked Singapore first out of 141 countries on its Global Competitiveness Index, but the city-state ranked 37th in the area of shareholder governance.

With the exception of real estate investment trusts, SGX has been hit by a spate of delistings and has struggled in recent years to attract quality listings, with many companies choosing rival markets such as Hong Kong and Australia.

In March 2010, there were around 630 companies listed on the SGX mainboard, but that number has fallen to around 520 this year. For the three months ended September, cash equities accounted for only 36% of SGX's total revenue, down from 40% a year earlier.

On the flip side, Mak said that while there were only 130 listings on SGX's secondary Catalist board in March 2010, that number had risen to around 220 by July this year.

Still, he said the Catalist board -- set up in 2007 with less stringent listing rules to spur the growth of young companies -- tended to attract smaller, less established firms without proven corporate governance track records.

Mak, whose study documenting 12 corporate governance failures in Singapore was published last month by CPA Australia, said a close examination of recent examples of poor enterprise management in Singapore supported his view that the quality of companies drawn to the Singapore Exchange is declining.

"I am fully convinced it is worsening," said Mak. "The actual substance and the practice of companies -- I think that has deteriorated, very clearly."

Mak's study included chapters on beleaguered water treatment company Hyflux,  troubled aspiring conglomerate Transcorp and struggling financial technology firm Ayondo.

Founded in 1989, Hyflux runs desalination and water treatment plants essential to Singapore's water self sufficiency, but stumbled when it entered the domestic electricity business. Currently shouldering S$2.8 billion ($2 billion) of debt, Hyflux is negotiating a possible rescue with Utico, a United Arab Emirates-based utility provider.

Billed as the first fintech firm listed on SGX in 2018, Ayondo had its shares suspended from trading less than a year after it went public.

The company was thrown into the spotlight with revelations about internal strife over the company's future direction, and high-profile departures involving its chief executive and chief financial officer.

Transcorp was a leading Southeast Asian distributor of golf equipment that faced problems after it veered from its core business and branched out into investments that it had little experience in, including commercialization of commodities like iron, copper and gold, turning the company into a loss-making enterprise.

A key problem for Singapore, is that although SGX can impose fines on companies that go astray, it cannot penalize the directors of those companies in the way that Bursa Malaysia can, said Mak.

Responsibility for penalizing company directors lies in the hands of the Accounting and Corporate Regulatory Authority, along with the Commercial Affairs Department, and involves criminal cases that are often difficult to prove.

Mak also pointed to Hong Kong's Securities and Futures Commission, which has actively imposed penalties on errant directors when necessary. Last month the commission obtained disqualification orders against senior managers of investment holding firm Inno-Tech Holdings after they were found to have breached their duty to exercise due diligence as directors.

A typical response for SGX in such cases is to start monitoring specific companies and issue individual notices of compliance, which, Mak said, often do not go far enough when it comes to disciplining companies and senior managers who have erred.

In response to queries from Nikkei, an SGX spokesperson said that the number of companies affected by corporate governance issues remained relatively low "versus the universe of almost 750 companies," adding that the affected companies were relatively small "in terms of market capitalization."

SGX said it would consult over the next few months on a proposal to require companies without a Singapore-based auditor to appoint one, and is planning to establish a dedicated whistle-blowing office "to ensure tip-odds, complaints, feedback and short-seller reports are dealt with swiftly and effectively."

SGX said it had taken a targeted approach to dealing with errant companies, or those that may be in breach of listing rules, issuing nine notices of compliance in the 12 months to June 30, and another three in the three months to Sept. 30.

"Other steps taken include collaborations with professional bodies, such as Singapore Institute of Surveyors and Valuers for property valuations, and the Institute of Surveyors and Appraisers, Singapore, for business valuations, to improve quality of disclosure in valuation reports," the spokesperson said.

At the IPO stage, SGX said it had also worked with the Association of Banks in Singapore to enhance the IPO Due Diligence Guidelines used by banks when reviewing and preparing companies' disclosures.

"We have also aimed for a swift response to pressing issues," the spokesperson said. "For example, we issued new rules on voluntary delistings by companies within seven months to ensure exit offers are both fair and reasonable, and also to exclude controlling shareholders from voting on delistings."

Oversea-Chinese Banking Corp. credit research analyst Ezien Hoo said that while Singapore's requirement for quarterly financial disclosures was a positive when it came to local corporate governance requirements, the inconsistency regarding the extent of disclosure was a problem.

"Companies vary in terms of disclosure of operating metrics -- margin and sales volume breakdown on product lines -- that can help analysts and investors better understand and track the underlying businesses, [like] details over debt borrowings and facilities," Hoo said, adding that assumptions on provisions and impairments were also generally not given, making it difficult to assess if companies were sufficiently provided for in such areas.

Ric Marshall, executive director at MSCI ESG Research, said that in his view, while Singapore had one of the strongest corporate governance codes in the world, governance practices often did not meet the prescribed standards.

Marshall emphasized that this was not a problem unique to the city-state, with companies in markets elsewhere also struggling to live up to global benchmarks for accountability.

"The renewed focus on strengthening governance standards and practices in this market is a very good sign for the future," Marshall said. "But companies must do more than merely acknowledge the need for strong corporate governance, they must actively practice it."

Singapore's central bank, the Monetary Authority of Singapore, told Nikkei that it recognized the important role played by good corporate governance in ensuring the well-being of listed companies and their stakeholders.

"To this end, MAS announced the formation of the Corporate Governance Advisory Committee earlier this year to advocate good corporate governance practices among listed companies in Singapore," an MAS spokesperson said.

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