By Mak Yuen Teen

According to a Bloomberg report, SGX is planning to relax some of the safeguards it had proposed in its consultation on dual class shares, such as having a minimum market capitalisation of $500 million and a sunset clause. This is hardly surprising, even though I believe that the initially proposed safeguards would have made the potential pool of listing aspirants rather small, defeat the very reason why founders want dual class shares in the first place (to entrench themselves), or would be largely ineffective due to weak regulatory and shareholder enforcement in Singapore.

Reducing the minimum market capitalisation means that SGX is planning to fish in a different pond with smaller fishes, given that Hong Kong is proposing a minimum market capitalisation of HK$10 billion. The proposed relaxation of the sunset clause may have something to do with recent reports that potential Chinese tech listings in Hong Hong have told the exchange there that the sunset clause may pose problems given their variable interest structures and restrictions on foreign ownership. This is playing out exactly as I had expected because I always believed that proposed safeguards will be relaxed if they prove to be a deterrent to listings. With the Hong Kong Exchange confirming that it is allowing dual class shares and therefore likely to attract its fair share of such listings, SGX clearly feels that it would need to lower its requirements to remain attractive for such listings. This is what a “race to the bottom” looks like.

It seems the lessons from past and continuing scandals, especially relating to S-chips and other foreign listings, have not been learnt, even as investors in our market continue to pay the price. There are many cases of serious accounting, disclosure and other irregularities that have remained unpunished because of lack of enforcement, often because they involve companies with key management and controlling shareholders based overseas who cannot be held to account. Yet, SGX is now considering bringing in more listings, particularly foreign ones, with even lower corporate governance standards and shareholder rights. The problem is that SGX does not bear the full cost of the consequences of its actions.

SGX has a responsibility to look beyond the interests of its own shareholders and consider the interests of other stakeholders. An important group of stakeholders are investors in companies listed on SGX. Attracting more listings by claiming that it gives investors more choice is hardly a good argument if they are made to choose from among lemons. SGX should not just focus on attracting more listings without addressing fundamental weaknesses such as lack of enforcement and low valuations. Just as it has been telling other listed companies about the importance of sustainability and has made sustainability reporting mandatory, it should consider if its own actions will result in a sustainable, high quality exchange.

I hope that the SGX board has ensured that a proper risk assessment has been done as the company lurches into its new strategy of attracting listings with dual class shares. I also hope that key performance indicators (KPIs) for the CEO and other key management, such as the head of listings, include those relating to market quality – and that these market quality KPIs receive adequate weighting in their performance assessment viz-a-viz commercial objectives. Indicators such as trends in average valuation and liquidity of shares listed on SGX, and incidence of listings with serious irregularities, can ensure that the key management pay sufficient attention to quality of listings as opposed to just quantity. Similarly, appropriate KPIs that go beyond financial performance measures should be incorporated into vesting criteria for incentive-based schemes. History also tells us that the problems with poor listings may only come home to roost some time after the tenure of the current management and therefore the remuneration design should take this into account, for example through deferral or clawback provisions that go beyond their current tenure.

Finally, as the supervising authority of SGX, the Monetary Authority of Singapore should ensure that the corporate governance of SGX, including its remuneration policies for key management, are fit for purpose given the strategies that it is pursuing.