By Mak Yuen Teen
Note: This is part 2 of a series of posts explaining foreign listings on SGX and certain risks that investors should be aware of.
Recently, some Singapore companies have chosen to list overseas, especially in Hong Kong, rather than here. I asked one of these companies why it is choosing to list in Hong Kong. It is not because it is faster, or the admission requirements are lower or continuing listing obligations are less strict. In fact, it mentioned the “killer” due diligence process for a listing in Hong Kong. Essentially, it boils down to better valuations and the company’s target markets for its business.
I often hear of market players arguing or at least implying that our corporate governance standards are too high or our continuing listing obligations too strict, thereby discouraging companies from listing here, without offering examples of how this might be so. When rule enhancements are proposed, they argue about scaring off companies from listing on SGX. Some companies delisting from SGX cite compliance costs here even as they plan a subsequent listing elsewhere, like Hong Kong.
It is of course true that compliance costs for a listed company would inevitably be higher than for an unlisted company, for the simple reason that once a company is listed, it has public shareholders that require protection. We should certainly be careful about imposing rules that increase compliance costs that have minimal benefit for protecting investors. However, contrary to what some people say, listing requirements and continuing listing obligations on the whole are actually stricter in other markets like Hong Kong.
For example, Hong Kong has highly prescriptive rules for determining director independence incorporated into its listing rules, rather than the “comply or explain” approach to determining director independence currently practised in Singapore. There’s a minimum of three independent directors, compared to two here (although compared to Singapore, Hong Kong boards tend to be larger with many executive directors and more chairmen who are executive or who also hold the CEO position, even among the large companies).
Further, the Hong Kong listing rules require at least one of the independent directors to have appropriate professional qualifications or accounting or related financial management expertise and that is defined in the rules to be a person who “have, through experience as a public accountant or auditor or as a chief financial officer, controller or principal accounting officer of a public company or through performance of similar functions, experience with internal controls and in preparing or auditing comparable financial statements or experience reviewing or analysing audited financial statements of public companies.”
The fiduciary duties and duties of care, skill and diligence of directors are spelt out in both Hong Kong company law and the listing rules, whereas in Singapore, this is spelt out in the Companies Act for companies and difficult to enforce because they are criminal offences subject to a high burden of proof. A few years ago, I jointly supervised an honours thesis on administrative sanctions imposed by the Hong Kong stock exchange, and it is clear that the Hong Kong Exchange is active in taking companies and directors to task through censures and criticisms, much more so than here. Although we have a large number of foreign companies listed here, we lack a coherent regulatory regime to hold such companies and their directors and management accountable in the same way as for Singapore companies listed here. In effect, we have created an uneven playing field between Singapore companies and many foreign companies listed on SGX, when it comes to rules and enforcement. I will come back to this point in a subsequent post.
The Hong Kong listing rules require the exact remuneration of each director (including past directors still receiving remuneration) by name, broken down into different components. This includes salaries, bonuses, benefits and so on. This is unlike the band disclosures practised by most companies here. Since remuneration disclosures are required by the Hong Kong listing rules, explanations such as confidentiality of remuneration information or fear of poaching often offered for not disclosing cut no ice in Hong Kong.
Therefore, on the first question of why a foreign company choose to list here, investors should be wary about companies listing here where there are other developed exchanges closer to where the company is located where it could have listed. For China companies, the stock exchanges in Hong Kong, Shanghai and Shenzhen would appear to be more logical choices. When it comes to disclosure and corporate governance rules, China is prescriptive. Under guidelines for independent directors introduced by the China Securities Regulatory Authority, independent directors should not serve on more than five boards of listed companies and their tenure on a particular board must not exceed six consecutive years. And quarterly reporting is mandatory.
Rather than strict listing standards here driving companies away, investors should be more concerned about lower listing standards and weaker enforcement for foreign companies attracting the wrong kind of companies to list here. This is not to say that there should be absolutely no reason for foreign companies, including Chinese companies, to choose SGX. Listing in Singapore probably make sense for companies in ASEAN or whose target markets are in ASEAN, or where the company’s home country does not have a recognised international exchange. If there are no compelling reasons for a company to list on SGX, it may be listing here because of “regulatory arbitrage” – to exploit weaker listing standards or limitations in enforcement.
