Maybe it used to be just a nice house in a risky neighborhood but Singapore now has its sights set on its future role in the global village. And that involves putting in place world-class corporate governance arrangements.
When the Asian contagion sent the currencies of Korea, Thailand, Indonesia, Malaysia and the Philippines into free fall in late 1997, Singapore – at least technically – did not go into recession. Despite the turmoil around it, the small archipelago state with barely more than 3 mn people, precariously poised between Malaysia and Indonesia, rode the tropical storm pretty well. Part of this was due to the openness of its economy and its markets. Relative to its neighbors it was perceived as a highly disciplined, well-regulated business environment. But it was, and still is, categorized as an ’emerging market’ when in reality this rich, highly organized, wired and controlled state is in many respects better run than many ‘developed’ markets.
‘The important thing in emerging markets is avoiding the traps,’ maintains Roger Yeo, senior vice president at security dealer and investment bank Vickers Ballas. He believes that capital will gravitate to Singapore and to firms like his because of their consistency, competency and scale. ‘We can help attract and redirect it,’ he adds.
Governance gap
The vision is slightly blurred at this stage however. Speaking at the Singapore Institute of Directors last December, minister for finance Dr Richard Hu said, ‘We cannot sit back in complacent ease, imagining that Singapore was entirely free from the taint of the [currency] crisis.’
He went on to refer to the World Economic Forum’s number one competitive ranking of Singapore based on its performance in areas such as economic management, quality of government, finance and infrastructure, technology and institutions. ‘In almost all categories related to corporate governance,’ he added, ‘such as quality of corporate boards and financial disclosure, we consistently lagged behind our OECD counterparts and in some instances, Hong Kong.’
In order to address this shortfall and to reinforce Singapore’s claim to be the major financial center of the region, the Ministry of Finance, the Monetary Authority of Singapore and the Attorney-General have begun a comprehensive review of corporate regulation and governance. As the first step, three private sector committees have been set up to look into company legislation and the regulatory framework; disclosure and accounting standards; and corporate governance.
It is worth recalling that while Singapore is a highly integrated, multiracial state, it is dominated by Chinese family-run businesses. It is said that the lion’s share of its economy is controlled by 100 key people. This environment, without wrongdoing being alleged, is likely to lack transparency and lead to suspicion on the part of overseas investors in particular, which Singapore is anxious to attract and retain.
Dr Philip Pillai, a partner with Singapore law firm Shook Lin & Bok, chairs the first of the new committees. He says its principal role is to ‘update the company law which is basically that of the UK’ and which has not been substantially overhauled since 1948.
The same process is currently underway in the UK where most company law is irrelevant to the majority of companies, which are small and do not fall within the scope of many of its provisions. Pillai’s committee is looking at current practice and thinking in several jurisdictions including the UK, US, Australia and New Zealand. The key questions that the committee aims to answer are the following:
– What is the appropriate legal regime for large listed companies?
– What regime is appropriate for smaller companies to remain flexible and inventive?
– How does the law promote and encourage investment?
– How can the statute book be made less ambiguous when it comes to capital raising?
– What investor protections need to be put in place?
Eclectic approach
Clearly these are big issues and the committees, which were formed in December 1999, have been given a year to report. But their eclectic approach – apart from being likely to produce a workable and all embracing outcome – does mean that there need be no reinventing of the wheel. If an appropriate measure has been instituted elsewhere, borrowing and adapting it makes a lot of sense.
Victor Yeo, associate professor at Nanyang Business School and head of the department of business law, notes that this review was not triggered by a particular crisis or problem. ‘It arose because of our objective to attract foreign investment,’ he explains. ‘We already have quite a high degree of transparency but as we become increasingly recognized as a developed market we are moving into a different league. We have to adopt practices at least as good as those in the best markets in the world.’
The second of the two committees is carrying out a similar exercise to ensure that accounting practices adopted in Singapore are at least as good as those used elsewhere. Some of the better known Singapore companies, such as Singapore Airlines or Singapore Telecommunications, are already well in tune with international accounting standards, practices and investor expectations. Others however, still do not produce quarterly reports, which are typically expected by foreign investors, especially those in the US.
The third and last of the committees is similarly examining corporate governance best practice in overseas markets. And in several respects Singapore may be in advance of many other countries.
Because of a number of factors Singapore has what one senior businessman describes as a ‘stakeholder’ mentality. Racial harmony has been key, for example, in maintaining stability, where in other countries, notably in Indonesia at present, religious tension has proved to be pretty close to the surface.
Secondly, Singapore’s day-to-day strict legal regime, restraining various sorts of behavior from dropping litter and chewing gum to drug importation under penalty of fine, the lash or long periods of imprisonment, is widely respected by the citizenry. Financially, the republic’s central provident fund (CPF), the social welfare fund that all workers contribute to – which provides welfare benefits such as pensions, is a ready-made stakeholder vehicle in terms of bringing long-term benefits to contributors.
This broad understanding of the stakeholder society was one of the models for Tony Blair’s New Labor party when it was still in opposition; and it is well understood in the tightly run business world of Singapore. So translating this into modern corporate governance is thought by some to be a formality, though in the financial sector there are already moves to strengthen corporate governance practices further.
Banking & insurance
Under new rules to liberalize local banks, five-member nominating committees are drawn from bank boards. These are to ensure that those who are appointed to key management roles are the most competent. In order to promote foreign investor confidence in the banking sector it is likely that pressure will be applied to ensure local banks continue to consolidate and become better able to channel investment into the country.
The insurance sector is also under pressure to reform along similar lines to the banks. Liberalization and consolidation are likely to follow and the new standards of safety and soundness will be reinforced. The overall change in the financial sector is from regulation to supervision once higher standards of governance are in place.
The financial sector is leading the way because it is the key infrastructure underpinning every aspect of Singapore’s commercial life. At the same time roughly one third of Singapore’s GDP is produced by the financial sector, with the other two thirds being contributed by transportation (shipping and cargo handling) and tourism. One great hope for the future is that small businesses will, with the assistance of foreign investment capital, develop new, high value-added manufacturing operations which will help diversify Singapore’s economy further, producing growth for investors domestic and foreign alike.
Calling big thinkers
To press home the message Lee Kuan Yew, the ‘father of modern Singapore’ since its independence in 1965 and now senior minister, speaking to a Chinese New Year gathering in February, spoke of the need for Singapore to attract risk takers. ‘In this new phase it is people with the imagination, the drive, the willingness to think big and take risks who will make the economy grow and themselves rich,’ he declared.
However, those imagineers will only succeed if they have capital – both intellectual and financial – to help them. While education is a major national priority it is at the same time vital to put in place standards of transparency, disclosure and reporting based on legal and regulatory structures which will serve to give confidence to investors.
It is early days yet in the work of Singapore’s three new corporate governance committees, but as senior minister Lee outlined in his most recent book, Singapore Story, ‘Complacency is our greatest enemy.’ If this dynamic island economy is to make it in the big league where capital flows freely from investors to those who put it to work, confidence in Singapore’s standards as a fully emerged market will need to replace admiration for its achievements as an emerging one. That is the reason this review is so vital to its future in the increasingly globalized and deregulated business environment of the twenty-first century.
