By Mak Yuen Teen
I was one of the early critics of the dual commercial and regulatory roles of the Singapore Exchange (SGX). To me, the commercial role will trump the regulatory role if they both reside in a demutualised stock exchange which is listed. I was never sold on the argument that the CEO of an exchange with both roles would balance them appropriately as he needs to think about building a quality exchange in the long term. Unfortunately, in the long-term, he may no longer be the CEO, so why would he care, especially if a significant part of his remuneration is driven by the short-term profits or share price of the stock exchange.
Source: Guardians of the Capital Market, Mak Yuen Teen and Chris Bennett
I have heard a former senior management of the SGX admit in a public forum that having an exchange regulate companies listed on itself is like a company trying to regulate its own customers. A former CEO of another exchange told me that he couldn’t say so when he was the CEO, but that there is definitely a conflict.
When SGX decided to form a separate regulatory subsidiary from September last year, I thought this would go some way towards better addressing the conflicts – although like some others, I felt that the better model is to totally remove the regulatory role and place it in a separate entity, similar to countries like UK. Nevertheless, I was prepared to give it a chance, partly because at the end of the day, it is not only the structure that matters. Putting the regulatory role in a totally separate entity may not necessarily be effective if this separate entity is poorly resourced or does not have the right people, for instance.
However, while it is still early days, I am starting to be skeptical of the current model. The reason is that while SGX Regco has undertaken certain initiatives that are consistent with strengthening regulation and transparency in the market, such as the launch of a guide to prevent insider trading and proposed enhancements of the continuous disclosure rules, it has been at the forefront of advocating for far more significant changes that move the market in the opposite direction, such as the proposed watering down of quarterly reporting and the introduction of dual class shares. I believe the sum total of the proposed changes so far is a regression in investor protection.
We can spin it in whatever way we want, but ultimately, I see the proposed changes on quarterly reporting and the introduction of dual class shares as being driven by the objective of attracting more listings, which is surely commercially motivated.
With the establishment of SGX Regco, it seems that SGX now has even more direct influence over the setting of the rules that may benefit it commercially. Take the case of the review of quarterly reporting. The decision to introduce, implement and modify it used to be considered and recommended by bodies that sat outside of SGX – for example, the Disclosure and Accounting Standards Committee and Council on Corporate Disclosure and Governance. The SGX implemented the recommendations after it has been approved. Now everything seems to be done within SGX, by the SGX Regco, presumably with inputs from the “independent” listings advisory committee (within SGX) whose composition may not properly represent different stakeholders in the market (particularly investors).
The establishment of SGX Regco as a more “independent” front-line regulator seems to have helped legitimise SGX having more say in revising the rules on quarterly reporting. Of course, MAS as the supervisory authority of SGX will still have to approve rule changes, but SGX now seems to have more influence than in the past. A review of such a fundamental change in reporting requirements for listed issuers should not be undertaken by SGX Regco, in the same way that a review of the Code of Corporate Governance should not be left to it.
In the case of the proposed introduction of dual class shares, the CEO of SGX has kept largely out of the spotlight although he has mentioned it in some speeches, including announcing the decision to proceed with it. Instead, it has been the CEO of SGX Regco who has been the public “voice” for introducing dual class shares here. Compare this with Hong Kong, which admittedly does not have a separate regulatory subsidiary, where the CEO of HKEx has been the public face in advocating for dual class shares. It is rightly his role. I did not notice the Chief Regulatory Officer and Head of Listing there publicly garnering support for dual class shares. I believe that it is the CEO of SGX who should have been fronting up to the public to make the case for dual class shares, not have SGX Regco do that. SGX Regco of course should be involved in formulating the rules if dual class shares are introduced.
SGX Regco is so prominent in advocating the loosening of quarterly reporting rules and introduction of dual class shares that it may detract from whatever it’s doing to improve market quality. This is especially so as we have yet to hear of any significant new initiatives to improve enforcement or seen any significant evidence of enhanced enforcement. If we want to rebuild investor confidence and improve valuations, more timely and forceful enforcement should be a priority.
Reducing quarterly reporting and introducing dual class shares will not address the fundamental reason why good quality companies are not choosing to list here, and why more companies are delisting or seeking a dual listing elsewhere (which is likely to result in a later delisting from here) – which is the low valuations here compared to other developed markets. No one I have spoken to, including market players who advise companies on listing, have cited strict rules as being the main reason for listing elsewhere. Companies are unlikely to delist due to compliance costs if their valuations are attractive or their shares attract sufficient investor interest.
I am concerned that SGX Regco is taking an overly commercial view when looking at market changes such as reducing quarterly reporting requirements and introducing dual class shares. It risks been seen as a means of legitimising more market-friendly initiatives, which will harm its credibility. Perhaps this is inevitable when it remains as part of SGX. I would like SGX Regco to succeed but I’m afraid that it may already be proving the skeptics’ case that having a separate regulatory subsidiary is not the long-term solution to improving the quality of the Singapore market and enhancing investor protection.
