"Charting the Way Forward: An Outcome Based Approach to Corporate Governance" - Speech by Mr Ong Ye Kung, Minister for Education and and Board Member, Monetary Authority of Singapore, at the Securities Investors Association Singapore’s Global Corporate Governance Conference 2019, on 23 Sep 2019
Distinguished Guests, Ladies and Gentlemen,
1. Thank you for inviting me to this year’s Global Corporate Governance Conference, which marks the commencement of the Corporate Governance Week 2019.
2. I was at the Singapore Institute of Directors (“SID”) Conference two weeks ago where I talked about some of the good outcomes of corporate governance:
3. First, it must protect the interest of minority shareholders, and treat them fairly. It is a logic we encounter in many fields – for we trust a system to the extent to which it protects the smallest or the weakest stakeholder. It is like a service provider that takes care of its smallest spending customer, or a society that looks after its weakest member. That is why MAS and SGX have placed considerable emphasis on protection of minority shareholders, in our latest revision to the SGX listing rules in July 2019 concerning delisting and privatisation.
4. Second outcome, it must lead to companies that define success more broadly than maximising any profitability index or metric. This is because no single metric will represent the multi-faceted nature of our organisations, and chasing just one metric always distorts our purpose. Good governance encourages companies to recognise the interest of various shareholders, address them and evaluate their performances in a much more holistic manner.
5. Third, good governance must encourage rather than stifle innovation and dynamism. Managing risks well, and understanding the strategic, legal and moral parameters of the environment we are operating in is a pre-requisite to help a company innovate, thrive and compete better. Good governance will therefore not go overboard, with rules and regulations that are so over-bearing that they clamp down entrepreneurial activities.
6. Fourth, and this is a hard one, good governance minimises and forewarns, but cannot eliminate failures. It is simply not realistic. To eliminate failures is impossible and futile. Failure is part of risk-taking and innovation, and an integral feature of a competitive and free-market economy.
7. Finally, it must encourage and applaud a long-term perspective to understanding trends, tackling challenges and seizing opportunities. A company that merely fulfils short-term goals and fighting fires all the time will not sustain long-term competitiveness. There are often trade-offs between the two, short term and long term, and stakeholders need to play their part, to signal to management that they value a long-term perspective.
Spirit of Rules and Compliance
8. Unfortunately, it is common for us to forget these outcomes when we think of corporate governance. Instead, our preoccupation tends to be the rules and regulations, and how to comply with them. But I think it is quite natural because compliance is for here and now, with auditors or the Board chasing for explanations and answers and an AGM or result release looming. When that becomes the preoccupation, a process-driven, tick-box approach rather than outcome-based approach takes over. Companies observe rules in form, rather in spirit or in substance
9. But we cannot wish this phenomenon away. Like it or not, rules and regulations, while not synonymous with corporate governance, are a large part of it and are a key mechanism to bring about better corporate governance. How we enact and enforce rules and regulations becomes an exercise of artistry, not just to tackle problems here and now, but to nurture a stronger and better culture for corporate governance. Hence, rule makers and enforcers, like companies, also need to take a long term view!
10. The key question is – how do we bring about better rules and regulations that are good for the long term?
11. One trend is clear, which is that rules need to cater to the rapid advancement of technology that is disrupting industry and market activities. Hence, rules need to be more technologically neutral. One example is the Securities and Futures Act which regulates securities and derivatives activities, regardless of whether these services are provided via brick-and-mortar facilities or fully electronic platforms.
12. Another clear trend is the need to be risk focused, for this is ultimately what we are worried about – the risk which underlies the activity that we are trying to regulate. This suggests a differentiated approach to rule-setting, depending on the risks the activity or the entity imposes. This has been the approach taken in the Securities and Futures Act too, with multi-tier rules applying to different entities and nature of their activities. In fact, a risk based, differentiated approach would characterise the entire financial services regulation regime that MAS has adopted for almost two decades.
13. The third trend is less clear to me, which is the level of granularity of rules and regulations. It is less clear because there are strong proponents for two approaches. One school of thought is that given the industry has become more complex; rules need to be more detailed, specific and prescriptive. There is comfort in knowing that market participants are carrying out prescribed activities or measures, whether for risk mitigation or disclosure, hence assuring a minimum level of protection. Another school of thought is that given the complexities, it is not possible for rules to address all scenarios and activities, so it is better to be less prescriptive, and focus on the spirit and objective of the rules.
14. This is almost a philosophical argument. I can only offer a reference point in the education system, which is a sector I know well. More than two decades ago, MOE went through a period of standardising practices across schools. MOE prescribed the best practices, and had inspectors visit schools to check compliance with MOE’s assessment rubrics. The exercise worked, because the adoption of standard good practices lifted the quality of education across the board nationally.
15. Having attained higher standards, the phase of prescribing best practices and centralised inspection is behind us. Quality assurance of schools now shifted to self-appraisal and periodic external validation based on an organisational excellence model. We now articulate the broad objectives of education – develop children holistically, ignite their curiosity to learn for life – and make space for each school to develop their own practices. Innovative practices are then shared with other schools, who are eager to adapt and adopt what works for them.
16. My conclusion is that whichever approach we take for rule-setting, it has to be fit for the times, and cognisant of the stage of development of the industry. This should also be a key consideration in the review of rules related to corporate governance. A case in point is the 2018 review of the Singapore Code of Corporate Governance. We judged that the industry is now far more aware of the objectives and spirit of the Code. So we made it more streamlined and more principle-based, and encourage listed companies to engage meaningfully with their stakeholders and promote long-term sustainable business performance – not because of prescribed requirements, but because they want to live up to the principles of good corporate governance.
17. Another rule currently undergoing review in both Singapore and the US, is the practice of quarterly reporting. This is a subject of some debate. Quarterly reporting is useful because it ensures frequent disclosures that reduce information asymmetry between insiders and external investors. On the other hand, some argue that it results in an over-emphasis on short-term results at the expense of long-term strategies, and imposes high compliance and cost burdens not commensurate with its benefits.
18. SGX has put out a consultation document, and is collating and considering various inputs and feedback. I think the outcome will depend on the assessment and judgment as to whether the industry is mature enough to abide by the spirit of the requirement. Companies must want to conduct meaningful engagement with their stakeholders, keep them well-informed through pertinent, timely and high quality disclosures. They must fulfill the maxim “there shall be no surprises” – even without prescribed frequencies of reporting.
19. Regardless of the outcome of the debate on rules and regulation, I think there are two no-regret moves.
20. The first, continue to develop corporate leaders, to engender a culture where they strive to practise good corporate governance by adopting exemplary practices and weeding out the poor ones. SID has contributed to these efforts by publishing a comprehensive set of Corporate Governance Guides, with the support of ACRA, MAS and SGX. SID has updated these handbooks following the revision of the Code of Corporate Governance in 2018, and they provide detailed guidance for companies looking to enhance their corporate governance practices. Earlier this year, an industry-led Corporate Governance Advisory Committee, comprising industry leaders and investors, was established as a permanent platform to promote good corporate governance and provide practice guidance.
21. The second no-regret move is to better educate investors, who have a huge part to play. Discerning investors who can tell which companies are deserving of their hard-earned monies, which company offers a better risk-return trade off, will spur improvement in the standard of corporate governance. To help inform investors, the national financial education programme, MoneySense, has been committed to the empowerment of investors by equipping them with the knowledge and skills to make sound investment decisions.
22. MoneySense is continuously looking at ways to deliver our financial education messages to all segments of the population more effectively. It is proactively reaching out to employers to bring financial literacy workshops and talks to workplaces. It is also reaching out to our Institutes of Higher Learning. My Money Public Seminars, which focus on topics of interest to retail investors, have been ongoing for 10 years, and they are organised in close partnership with SIAS and the Association of Banks in Singapore (ABS).
23. In conclusion, good corporate governance does not just benefit a company and its stakeholders. If it is widely practised, it leads to an atmosphere of collective trust in Singapore companies. This is important because it will strengthen the Singapore brand and this will open up more opportunities for everyone.
24. SIAS has taken the lead to champion the interests of investors by facilitating constructive engagement between investors and issuers. Platforms like this conference allow for the sharing of ideas and best practices and enable investors to understand what they should be looking out for in companies. I congratulate SIAS on its 20th anniversary and I wish you a fruitful conference ahead. Thank you.