By Mak Yuen Teen

Last week, SGX Regco published a watchlist of 53 directors and executive officers of 21 companies. According to it, these are “directors and executive officers who do not possess the character and integrity expected of their office pose potential risks (reputational, compliance or otherwise) to companies”. They have been reprimanded by SGX, or who in SGX’s opinion did not extend the necessary cooperation to it. Issuers who intend to appoint any of these individuals as directors or executive officers must seek the views and guidance of SGX before the proposed appointment.

This is a good initiative. There was a further report on this initiative in the Business Times today (June 4, 2018) titled “SGX RegCo says director watchlist not permanent”.

The practice of public reprimands  was introduced by SGX a few years ago. Prior to that, SGX used private reprimands and I had criticised it as a weak deterrent against errant directors.

Today, SGX Regco has enhanced regulatory powers that allow it to publicly reprimand and fine issuers, and to publicly reprimand directors (but not to fine them). SGX Regco also has a disciplinary committee and an appeals committee. When this system of independent committees was introduced, I felt that while due process and natural justice is important, there is a risk that the enforcement process becomes too “bureaucratic”. The disciplinary committee will not want its actions to be regularly or even sporadically overturned by the appeals committee, so there is likely to be an effort to ensure that the two committees are on the same page before any action is taken. This may then require many people to agree to an enforcement action. Add to that the fact that the committees are made up of market practitioners, there is also the risk of conflict, in the sense that they or their friends or acquaintances may be the ones facing possible enforcement actions (some members on the committees may themselves be serving on boards or advising them). Of course, there are conflict of interest procedures in place but such procedures usually deal with only the clearcut conflicts (and the rest is up to the individual member’s own standards and values). I was not confident that the enforcement process would be timely enough or would be used sufficiently to be a real deterrent. As I commented in the Business Times report, I thought those on the watchlist are just the “tip of the iceberg” of directors and key officers who have not properly discharged their duties.

I was also quoted in the report about the practice of reprimanding issuers, directors and key officers in Malaysia. There is a tendency here, which I find quite irritating,  for us to downplay whatever Malaysia is doing and to assert that we are doing more without any facts to support it. One often hear comments like Malaysia only have rules, but doesn’t enforce.

Let’s look at enforcement by the Malaysian stock exchange, Bursa Malaysia. Between 2008 and 2017, Bursa has taken a total of 545 enforcement actions involving 223 public-listed companies (PLCs). Of these, 424 involved a public reprimand and 2 involved a public reprimand and fine. Over the years, Bursa has shifted its emphasis from taking enforcement actions against PLCs to taking such actions against directors and officers themselves. This makes a lot of sense as companies are not real persons and incapable of actions, so any wrongdoing must be the work of directors and officers. Further, if fines are imposed on issuers, it is shareholders who end up paying.

Over the same period from 2008 to 2017, Bursa has taken 1,072 enforcement actions against 436 directors and/or principal officers in 92 PLCs, of which 148 involved public reprimands and 856 were public reprimands and fines. Private reprimands were only used 68 times.

I am sure at this point, some readers may be thinking that there is more enforcement action in Malaysia because directors and key officers there are more badly behaved. This is not true, or certainly is not the only explanation (and frankly, I have observed so much questionable conduct here that I am hesitant to say our directors and key officers are necessarily better behaved).

Let’s look at the nature of the breaches that enforcement actions are taken against. In 2017, there was a total of 123 enforcement actions against PLCs and directors/principal officers and of these, 92 were for a delay in submission of financial statements, 3 for deviation in or inaccurate financial results, 7 for delay in immediate announcement of material information and 14 for inaccurate/incomplete announcement. In fact, in 2015, there were 200 enforcement actions just for delay in submission of financial statements. Note that quarterly reporting is mandatory for all PLCs on Bursa Malaysia (another feather in Malaysia’s cap in my view), so the risk of late submission of financial statements is higher.

With respect to granting extension of time for submission of financial results, Bursa is rather strict. Its stance is that an extension is granted only in circumstances where the reasons giving rise to the delay in making the submission within the prescribed time frame are not within reasonable control of the PLCs. It generally rejects extensions due to dispute with external auditors, appointment of provisional liquidator, lack of resources to finalise accounts, delay in procuring valuation reports etc because it takes the view that such delays could have been addressed/resolved expeditiously which the PLC failed to do so.

In instances where a PLC delays its submission of any of its financial statements and no extension of time is granted by Bursa, suspension kicks in automatically 5 market days after the due date and will only be lifted when the outstanding financial statement is issued. Prior to this, the necessary disclosures would be required to be made by the PLC, amongst others, if it cannot make the issuance on the due date including consequences of such failure. Delisting proceedings will generally be initiated if the delay exceeds 6 months from the due date.

When we look at the practice here, we regularly see issuers applying for waivers to release results or hold their AGMs on time, often giving the most pathetic excuses. This would not be acceptable for issuers listed on Bursa and the directors and officers concerned could be sanctioned. Failure to make immediate announcement of material information and making inaccurate/incomplete announcements are also rarely punished here.

While SGX Regco’s initiative is a good step forward, a lot more needs to be done to improve market conduct and to ensure directors and key officers take their responsibilities seriously. In this instance, it may not be a bad idea at all to take a leaf from Malaysia’s rulebook.