Corporate governance: In Asia, S’pore is #1

Source : Straits Times – 22 Jul 2009

SINGAPORE has been ranked No.1 in Asia in terms of corporate governance in a new research report just when the issue is front and centre for global investors.

The report, by Swiss banking giant UBS and global corporate research firm GovernanceMetrics International (GMI), heaps praise on the way the Republic oversees the corporate and financial sector.

But there is some criticism, too – with suggestions that disclosure and shareholder rights could be improved here.

The research report, the first of its kind by UBS and GMI, comes after the global financial crisis and various corporate scandals helped bring sharp focus to issues of corporate governance.

A handful of Singapore-listed China companies have been rocked by scandal in recent months – though none on the scale of IT giant Satyam, which is at the centre of India’s biggest ever fraud case.

The new report cited various factors for Singapore’s strength in corporate governance, such as a strong centralised leadership and government oversight via its investment arm Temasek Holdings.

Corporate governance can affect the share price, growth strategies and shareholder returns, said UBS managing director of investment research Bill Sohn.

‘A lot of the fundamentals of companies such as earnings and cash flow, in essence, are driven by the way companies are managed,’ said Mr Sohn.

For investors looking at the longer term, good corporate governance lifts shareholder returns, the report found. Firms with high governance ratings tend to outperform low-rated ones in periods over a year but no such link emerged over three to six months.

The study analysed nearly 700 companies in 10 Asian markets, taking into account factors such as board accountability, financial disclosure, internal controls, shareholder rights and directors’ pay.

It also considered broader socio-economic factors such as the business environment and regulatory developments.

The Republic’s banking and finance sector was the best governed of those surveyed due to tight regulations imposed by the Monetary Authority of Singapore. These include a 12 per cent capital adequacy ratio imposed on banks.

‘The strong regulatory framework, especially in banking and finance, puts Singapore in good stead,’ said GMI research director John Jarrett.

Singapore also scored well on disclosure of directors’ pay and board accountability but some areas needed improving.

For example, the nation still lags behind other developed markets such as Hong Kong in terms of shareholder rights and financial disclosure.

‘Singapore’s corporate ownership is characterised by a pyramid structure where one single entity holds the controlling interest in a chain of companies,’ said the report. This means power being exercised by one block of shareholders at the expense of other shareholders, it said.

Disclosure and enforcement of accounting standards still lag behind those in developed economies such as the United States, partly as the professional accounting body here does not face scrutiny the way its US counterpart does.

Unexpectedly, financial centre rival Hong Kong came in No. 6 in the ranking.

It lost out because of several factors, including strong family-ownership control within companies and its board of directors. Earnings are disclosed twice a year, as opposed to quarterly here.

The focus on corporate governance and fundamentals will grow more vital as an investment consideration as the world emerges from recession, said Mr Sohn.

Mr David Gerald, president of Securities Investors Association of Singapore said more has to be done to put the Republic on par with world’s best practice.

‘Corporate governance standards in Asia are pathetic. We’ve come a long way from 10 years ago but is still far from the developed markets such as US and Europe.’