Published Date: 23 November 2005

CAD Corporate Governance Conference Corporate Ethics-  Emerging Challenges and Responses23 November 2005

Keynote Address by Mr Heng Swee Keat, Managing Director, Monetary Authority of Singapore
"Building Singapore as a Trusted Business Hub"


1   May I first congratulate Siong Thye and our CAD colleagues for organising this very timely conference, and for your success in drawing so many good speakers and such a distinguished audience.  I thank you for the privilege of joining the other speakers to address this conference.

2   In recent years, a series of corporate scandals have swept across the globe - in the US, Australia, China, UK, Japan and Italy, among others. Singapore has not been immune.  These scandals included fraud, corruption and ethical breaches. Some regulators have responded with tighter standards and stricter enforcement, which in turn have generated debates about the high costs and burdens of regulatory compliance. 

Why Trust is Fundamental to Doing Business

3   How should we in Singapore, as regulators, enforcement agencies, companies, and investors respond?  Have we gone overboard or have we not reacted sufficiently?  While recent discussions have focused on regulatory burdens, I hope we can move beyond these, to think about the long-term advantages of having high standards of corporate governance and ethical behaviour.  I believe a high level of trust in our companies can enhance our collective competitive edge and Singapore's branding as a trusted hub. 

4   Good corporate governance is fundamentally about trust and confidence. These are vital underpinnings of commercial transactions, and indeed, of the market economy.  When I trade or invest, I must have confidence that the other party will honour his side of the bargain.  If that is breached, I should have adequate recourse.  Over time, various legal, social and institutional mechanisms have evolved to minimise the risks of economic transactions and to promote trust. At the most basic level, trust is founded on strong personal knowledge and relationships.

5   However, in a complex economy, it is not feasible for investors to rely on personal knowledge alone. The limited liability company is a fundamental innovation that has spurred modern economic activities.  Yet we must not forget that this legal fiction of a company is a privilege, which brings with it clear obligations to investors and stakeholders it deals with. Hence, directors and management have to discharge certain fiduciary duties to shareholders, to ensure that the corporation observes rules and regulations, and fulfill its obligations to stakeholders.  The fundamentals of earning and maintaining trust have not changed.

6   Companies in Singapore rank highly in corporate governance. Last year, the IMD World Competitiveness Report ranked corporate boards in Singapore to be the best in Asia in supervising the management of companies. Singapore was also ranked first out of ten Asian countries in a joint study on corporate governance standards by CLSA and the Asian Corporate Governance Association. In June this year, CLSA further issued a special report on the Singapore Market to re-assess Singapore's strength in corporate governance, in light of the recent corporate incidents here. Singapore's strong position within Asia has been re-affirmed in the report.

7   The high standards we have achieved are the results of three mutually reinforcing components in our system - our legal, supervisory and enforcement regime; our disclosure standards and market discipline; and finally, the commitment of our corporate leaders to maintaining integrity. But each of these needs to be improved, if we are to sustain our reputation. Let me elaborate.

Legal, supervisory and enforcement regime

8   Our legal, supervisory and enforcement regimes have been consistently well-rated in the world, and we constantly update these to remain relevant.   In July this year, the Ministry of Finance issued the revised Code of Corporate Governance based on recommendations made by the Council on Corporate Disclosure and Governance (CCDG).  The Council's good work included detailed commentaries which were useful to users.

9 .  Within the region, Singapore has led the way in adopting international accounting standards. We have so far adopted all International Accounting Standards. While this generates short-term pains, convergence with international standards can help lower compliance costs, especially for companies with operations in overseas jurisdictions where such standards are accepted.

10   Recent corporate incidents (involving CAO, Citiraya Industries, Informatics and Accord Customer Care Solutions) have prompted some to ask if our regulatory framework is sufficiently robust.  I believe our regulatory regime is fundamentally sound.   We must accept that no amount of regulation can prevent all corporate frauds or failures - not here, nor anywhere in the world.  That these matters have surfaced and a number of these cases are currently before the courts is evidence that our system is working.  What is important is that we have a robust enforcement system, and a high level of disclosure, so that the legal framework and market discipline can work.

11   Let me take this opportunity to compliment my colleagues from CAD for their thorough work in the investigation into these cases.  The swift, impartial and professional enforcement of rules and regulations is critical to maintaining credibility, and ensuring that the law is respected. Our enforcement and regulatory agencies have shown the willingness and ability to take timely enforcement action when laws are breached.   

12  Still, we cannot be complacent.  Strengthening of corporate governance, accounting and disclosure standards, adapting international best practices to suit Singapore's context, must be an on-going effort.   I note that as part of its annual review, SGX is consulting on proposed amendments to the listing rules, to fine-tune requirements on corporate governance of listed companies.  I understand that these are not intended to trigger Sarbanes-Oxley type obligations and audit requirements. Rather, they are to ensure that directors systematically turn their minds to the internal control environment and the robustness of financial figures released to the market. MAS is supportive of the general direction that SGX is taking in this exercise.

Disclosures and Market Discipline

13   We have also sought to maintain accurate and timely disclosures by listed companies, so that investors can monitor the actions and prospects of the companies.  This is an important aspect of market discipline.  

14   There is room for better disclosures.  Last year, the Business Times Corporate Transparency Index results highlighted that there was generally a lack of quality disclosure by listed companies.  In a recent survey of institutional investors , more than half of the respondents indicated that companies typically do not disclose information beyond the minimum legal requirements. Companies can take the initiative to provide more meaningful information for the benefit of investors. We must not forget that our disclosure regime hinges on trust - trust that the company will uphold its duty of continuous disclosure of information that has a material impact on the company.

15   The Business Times is organizing the Singapore Corporate Awards to recognize companies with good corporate governance, investor relations and financial transparency. This initiative is a timely encouragement for our listed companies to enhance standards of disclosure and transparency.

Maintaining and Enhancing Levels of Trust - Corporate Leadership, Ethics and Culture

16  The sound supervisory and enforcement regime and market discipline are external disciplines on companies to observe good corporate governance.   But these are not enough, because of 3 reasons.  First, many business activities rely on trust.   Trust cannot be legislated. Nor can regulation guarantee ethical behaviour.  One may comply with the form of the rule, but not the substance or the spirit of it.  The collapse of Enron and WorldCom demonstrated what could happen when corporate, and even personal ethics go out of the window. Second, no regulations can possibly cover all situations - there will be many grey areas, where judgment of ethical boundary is necessary.  It is in such situations where the leadership of the firm faces the litmus test.  Third, regulation runs the risk of being a blunt instrument.   Detailed rules that seek to micro-manage companies can stifle creativity and risk taking. It can also lull investors into assuming that everything is well.   The 'ticking-of-the-box' mentality must not replace good judgment and common-sense.

17   The external discipline of regulators and the market must be complemented by the internal discipline of the company - the commitment of the leadership of the Board and management to good corporate governance and ethical behaviour, and to deeply embed a culture of integrity and ethical behaviour in their staff.   The greater our confidence that our Boards and management are embracing both the letter and the spirit of good governance, the more we can afford to have less detailed and prescriptive rules, and the greater the flexibility for businesses to innovate.   Trust in one company generates positive externalities for other companies. Thus, it is in our collective interest to maintain high standards of ethical behaviour and corporate governance, rather than one where frequent corporate scandals lead to calls for more detailed rules and controls.

18   Instilling a culture of integrity and ethical behaviour at all levels of the organization requires leadership, commitment and resources.  First and foremost, the leadership must set the tone and "walk-the-talk". This will have a deep influence on whether employees choose to report possible improper behaviour or "look the other way".  Companies need a clear statement of values, to act as a compass to guide its staff. However, such a statement of values pinned up on notice boards or flashed up on computer screen savers is not enough. To internalize these, the company's day-to-day decision-making and operating processes, its assessment and compensation of staff, and other systems must all reflect the values.   In other words, the ethical values and corporate governance practices need to be integrated with the operations of the firm, and not be left as a human resource or a compliance function. 

19   A number of listed companies in Singapore have started whistle-blowing policies to instill an internal culture of integrity. For example, in August last year, Keppel Corporation Ltd established a Whistle Blower Protection Policy to safeguard the Group's and its shareholders' interest against possible corporate improprieties. More recently, SIA set up a 24-hour "ethics hotline" for whistle-blowers to raise the alarm on any irregularities in the airline's business practices.  These are very positive initiatives.

Singapore as a Trusted Business Hub

20  Some skeptics may ask:  is all this investment of time, energy and resources worth it?  Are we not better off focusing on exploiting business opportunities?  In other words, does good corporate governance and ethical behaviour pay? 

21   Indeed, these are valid hard-headed questions.  Some studies, including by McKinsey Associates and other academics have shown that companies with good corporate governance command a premium in their valuation.  But that should not be the only indicator, since share prices reflect the influence of many other factors. What is more fundamental is the long-term survival and success of the firm.  The swift collapse of Enron, Parmalat and REFCO are good reasons to take corporate governance seriously.  But apart from avoiding disasters, ethical behaviour enhances the branding of the firm and its products.   Johnson and Johnson's swift recall of Tylenol in 1982 when some capsules were found laced with cyanide is still recalled in corporate history as an exemplar of integrity. Although its market share collapsed in the immediate aftermath, Tylenol became the most popular over-the-counter analgesic within a few years. Good corporate governance and ethical behaviour make good business sense - if we regard them as risk management tool for the long-term success of the firm, and a source of competitive advantage.     

22  At the national level, the benefit of good corporate governance and ethical behaviour is quite clear.  Singapore's strong reputation as a trustworthy jurisdiction is a key competitive advantage in attracting trade and investment, and in positioning Singapore as a premier financial centre and business hub.   When companies based here are associated with the values of integrity and credibility, they receive the recognition from global investors who are willing to pay a premium for their strong branding as trusted entities.   Many companies, local and foreign, use Singapore as the home base to raise capital, to site command and control functions, and to engage in high value R&D and marketing functions.   When companies, which are the basic building blocks of our economy, are associated with integrity and reliability, we all enjoy the spill-over effects of their good reputation.    


23   In conclusion, let me reiterate that Singapore's reputation as a trusted business hub gives us a competitive edge. It allows firms to differentiate themselves and to command a premium. This trust can be sustained and enhanced, if we deeply embed these in our system. Both external discipline and internal discipline are important. They are mutually reinforcing, creating a high norm of behaviour. The benefits accrue to the company, as well as to the rest of the economy. We must therefore work together and strive to retain and enhance our reputation as a trusted business hub, and I am confident that we can achieve it. I wish you all an engaging and fruitful day ahead. Thank you.