Beyond paper tigers: Evolving SGX’s regulations to match Asia’s needs

The Securities and Exchange Commission (SEC) of the United States mandated that the New York Stock Exchange (NYSE) revise its listing criteria to incorporate an audit committee consisting of independent directors (IDs) in 1976. This decision stemmed from the 1970 bankruptcy of Penn Central, a major railway company, which occurred due to financial difficulties that caught the company's directors off guard, coupled with revelations in 1973 that numerous firms had made illegal campaign contributions to President Richard Nixon's re-election campaign.

These high-profile scandals bolstered the notion that boards must be genuinely independent to effectively oversee management. Over time, this concept has gained widespread acceptance as a best practice in corporate governance globally. The Singapore Exchange (SGX) Rulebook mandates that independent directors make up at least one-third of a listed issuer's board, with the percentage rising to half if the chairman is not independent or serves as the CEO.

However, Singapore, like many other Asian jurisdictions that recognize the necessity of director independence, continues to confront the challenge of "paper tigers" – IDs who are unable or unwilling to effectively challenge controlling shareholders. This issue of independence is just one of several hurdles SGX RegCo must navigate in crafting its regulatory framework, particularly those pertaining to transparency and governance.

With Singapore's equities market undergoing a period of introspection and revitalization, it has become evident that certain assumptions underpinning our rules require reevaluation. While our exchange is relatively youthful, having been established in 1973, the world's oldest stock exchange, Amsterdam, was founded in 1602, and the NYSE dates back to 1792.

Many of the regulatory systems transplanted from older exchanges have proven effective, as they have aligned with international benchmarks such as accounting standards and market surveillance. However, it is becoming increasingly clear that some approaches, such as relying on board independence as a safeguard, need improvement. The tight integration of our corporate governance code with that of the UK, a market where institutional investors closely scrutinize corporate disclosures and penalize poor transparency or misconduct through selling down a stock or rejecting a resolution, also necessitates refinement.

Additionally, the rules governing shareholder voting, disclosures, acceptable free float levels, and avenues for minority redress warrant enhancement. While Singapore has observed instances of independent directors fulfilling their duties effectively and improving shareholder outcomes, as well as evidence of motivated shareholders successfully advocating for change, it is crucial for the regulatory environment to align with Asian characteristics.

The prevalence of individual-controlled and family-controlled companies in our market necessitates better addressing the conflict of interest between majority and minority shareholders. Furthermore, the limited number of institutional shareholders in our market suggests that market discipline alone may not yield desired results.

Consequently, we can anticipate seeing deviations from established practices in Western developed markets. SGX RegCo must pioneer novel rules and establish our own best practices, rather than replicating those from elsewhere. Investors have already witnessed the initial steps in this direction with the introduction of enhanced disclosures on remuneration, investor engagement, and dividend policy.

As mentioned in that announcement, we are also working on refreshing the Code of Corporate Governance, with some proposed changes potentially being groundbreaking worldwide. As we adapt our regulatory framework to better suit our Asian context, discomfort should be anticipated. We trust that directors, management, shareholders, and market professionals will carefully consider how they respond to these evolving circumstances.

In 50 years, it is conceivable that someone may be chronicling a pivotal moment when Singapore chose to forge its own path in regulatory matters.