By Mak Yuen Teen

It’s still a bit early but let’s see how 2018 has gone so far for minority investors on SGX.

In my opinion, it has been a horrible year so far. Thankfully, I am only a small shareholder in a handful of companies, sometimes becoming one so that I can attend shareholder meetings as a proper shareholder to ask questions. But for many others, they may not be quite so lucky.

Let’s consider the lowlights for the year. There has been another spate of scandals involving S-chips, with Midas Holdings arguably the biggest of them all, but certainly not alone. Some have been cases of further escalation of problems that had already started to appear before the year. However, no doubt at all, there has been yet another wave of S-chip scandals.

All scandals are terrible for minority investors but the difference for S-chip scandals is that some can make me ROFL – like trucks with accounting records on fire (wah, you mean keep two different sets of books but no backup meh?) or building catching fire but the fire is so smart that it only burns the accounting records. Or how about the one where a director said he did not receive letters from regulators sanctioning him because he was already gone or maybe not by the time the letters came – or the company was so careful about conflict of interest (presumably because it upholds the highest standards of corporate governance) that the other directors decided that it should not inform the reprimanded director about the reprimand. It was sort of like this but frankly, it is difficult to know when one look at the series of exchanges between the SGX and the company.

But S-chips are not the only ones with significant corporate governance, accounting and/or disclosure issues. We have local companies like Datapulse Technology and Trek 2000, and other foreign companies like Noble and YuuZoo – some with long-standing issues that reached a crescendo in 2018.  Another big shock was Hyflux, but its problems appear to be more a case of overly aggressive growth with poor financial management, although weaknesses in corporate governance and risk management were also arguably important contributors. I still think Hyflux deserves another chance to get things right because it was not personal greed, just huge ambition.

Then we have those companies which have so far managed to avoid being labelled a scandal requiring compliance reviews, special audits or regulatory investigations, but have nevertheless been remarkably adept at destroying shareholder value, often through dodgy transactions involving questionable valuations and undisclosed third parties, or multiple highly-dilutive share issues. I cannot name them because if I do, I will be receiving letters from lawyers engaged by those companies using shareholders’ monies threatening to take me to court. They are on my watchlist and I have no doubt they will become the scandals of 2019 and beyond. I have already written their obituaries.

Why are we in such a parlous state? There are many causes but the lack of true independence, poor quality and lack of accountability of independent directors on boards in Singapore is an important contributor. There are very few decisions that are subject to shareholders’ approval so shareholders are dependent on boards to look after the interest of the company and their interests. Unfortunately, independent directors are effectively appointed by controlling shareholders. When things go wrong, they are rarely held accountable – in the rare cases where regulators go after directors, it is usually only the executive directors.

Despite this, regulators seem happy enough to rely on independent directors and audit committees to do their jobs and only intervene when bad things become as certain as the sun will rise in the morning. The truth is, most audit committees are more like this:

One of the things I sometimes like to do when I meet with investors and other market players is to sort of play a game of “Name the independent directors whom you have encountered who you think are really good”. There will be a few names that come up – so yes, they do exist – but it’s much easier to come up with a long list of those who are far from good.

Many independent directors stay on boards for far too long. When they join, they may look like this:

After a while – especially having stayed for a long time – they become more like this:

2018 was also marked  by a wave of delistings, with the most controversial one arguably involving Vard Holdings. An offer from a major shareholder to take a company private looks to me just like a super duper interested person transaction.  However, if done through the voluntary delisting route under SGX rules, the major shareholder can vote. There is of course the “protection” of not more than 10% of shareholders voting against, but sadly, many shareholders seem totally oblivious or their shares just lie dormant after they have invested their hard-earned and difficult-to-withdraw CPF funds. And this is a really frustrating situation.

At Datapulse, there are more than 8,500 shareholders but yet only a couple of hundred seem to have any interest in what is going on. Some probably don’t even remember that they own shares in the company. Therefore, someone buying 29% can control the whole company – and this situation of a minority-controlling shareholder being able to control the board is repeated across many companies. If only our regulators are more active in looking at concert parties and at board and management control in such situations, when determining whether a mandatory general offer should be triggered.

However, I cannot really blame minority shareholders if they stop attending AGMs or stop asking questions at AGMs because 2018 also was the year of the defamation suits for shareholders. There are also other companies where the boards are quite hostile to questions from shareholders (although there is also the odd shareholder who goes too far and becomes abusive).

At the Datapulse AGM on 16 November, I witnessed a shareholder who regularly attends AGM who clearly was worried that he will end up like this.

He prefaced his questions with a fairly lengthy statement about relying on “qualified privilege”, that he means no malice, etc. Astonishingly to me, when questions were asked about relationships involving a director who was up for election and whether he is acting in concert with others, words like “innuendo” came flying out of the mouths of one of the directors,  who essentially said the questions should be focusing more on the competencies. Says who? One can hardly blame shareholders who attended the AGM going away thinking that things may not get better.

2018 was also the year of the underwater IPOs. At last count, there were 13 IPOs for the year, mostly on Catalist, and 12 are trading below the IPO price, some by a wide margin. One is trading at 27% of its IPO price, just about 8 months after its IPO. It’s so underwater that it may be able to see James Cameron on one of his deep sea dives.

A number of these IPOs had no public tranches – although those with grannies who go to the ATM and anyhow press to subscribe should probably say “heng ah!” (or lucky). There was one which closed with 90 applications for the public tranche – which were fewer than the queue at most McDonalds’ outlets way back when there was the “Hello Kitty” craze.

I hope investors on SGX don’t get too many “Wayco” presents this Christmas. In December last year, the then Datapulse board rushed out to buy Wayco like there was some pre-Christmas sale, and this Christmas, the new board needs to try to return it.

Will 2019 be better for minority investors? There is the possibility of a revision in the delisting rules which will require a delisting to be approved by a majority of the independent shareholders – essentially similar to IPTs. That would be good. It would also be good to stiffen up the rules about which director can be considered independent in a delisting situation (not that they are mostly independent to start with, but perhaps who can be considered less non-independent), and the standards and practices that IFAs are expected to adhere to. But I think the entire listing manual needs to be reviewed, with areas such as IPTs, acquisitions/divestments and share issue mandates among those that may need major changes to align with other markets and provide better safeguards.

The recent announcement of regulatory investigations into Noble Group and its subsidiary is welcome – but there is a spate of companies requiring similar investigations that they may need to take a number. It remains to be seen if this is the start of a ratcheting up of regulatory enforcement or just a one-off.

As I said earlier, I see companies on the queue to becoming the scandals for 2019, so more pain is in store I am afraid. Minority investors need to continue to be vigilant. It would be good if they have a “scheisse” detector when they are looking at the announcements and financial statements of companies. Unfortunately, it is not available for sale on Amazon, Alibaba or other retailers.

2019 is likely to see the listing of companies with dual class shares here. It was actually threatened – I mean promised – for this year, but that did not come to pass (unless they may be currently on the sleigh from SGX and will arrive by Christmas).  My advice to minority investors is this: if your great grandfather has left you a big pot of money, you may want to try your luck. More seriously, unless you can afford to lose your investment, it is probably best to stay clear. There may be the odd one that will do well but we are seeing more of the pernicious effects of having different share classes with different voting rights in companies like Facebook, JD.com, Viacom and Snap, Inc. I think we will see more pushback against dual class shares in other markets and we are likely to get the smaller second- or third-tier dual class share companies heading here.

If 2019 sees quarterly reporting being rolled back, further denying minority shareholders timely information about companies, then maybe 2019 may beat 2018, but not in a good way.

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The writer is an associate professor of accounting at the NUS Business School who specialises in corporate governance. Readers may wish to note that this is the optimistic part of him who has written this article.