Date: May 9, 2022
First published in Business Times on 9 May 2022
Much of what constitutes good corporate governance involves issues that are not new. Proper and timely disclosure of material information, ensuring directors discharge their fiduciary duties to shareholders whilst overseeing management, and installing a regulatory framework that ensures a level playing field for all investors, have long been priorities for any marketplace worth its salt.
Yet, achieving good corporate governance is not a static concept. It is instead a constantly evolving target that requires all parties, from stakeholders to regulators, to play their parts.
The Securities Investors Association (Singapore) or Sias has seen the local financial market shift from a merit-based, prescriptive regulatory regime, starting in the year 2000, to one that is primarily disclosure-based, where market participants play central roles in enforcing discipline.
In such a regime, it is the duty of regulators to construct and maintain a regulatory framework that encourages transparency, adequate disclosure and fairness, but also one that balances the interests of minorities with those of majorities whilst simultaneously encouraging market growth.
Individual stakeholders and market discipline
Back in 1999 it was Sias’s experience that many small investors based their investing mainly on hearsay and rumours. Few practised proper diversification of their assets and many did not pay attention to fundamentals, nor did they challenge contentious corporate proposals.
The combined efforts of financial journalists, the government’s unbiased financial literacy programme MoneySense launched in 2003, and Sias’s various educational initiatives have helped change this. Many small investors are much more financially aware than in the past of all relevant issues that could impact the value of their investments.
Indeed, minority shareholders are playing an increasingly important role in influencing the direction of some corporate deals.
This was amply demonstrated in recent cases involving real estate investment trusts or Reits. For instance, at Sabana Reit’s annual general meeting (AGM) held on Apr 26, unitholders representing some 77 per cent of votes cast that day voted against a resolution to endorse the appointment of one proposed independent non-executive director of the Reit manager.
An activist fund manager had, prior to the AGM, led a vocal objection to the director’s appointment on the grounds that although he may have appeared independent in terms of form, he was not independent in terms of substance.
That the fund manager managed to garner sufficient support to overturn the appointment is testimony to the rising influence of activist minorities in providing market discipline – a role that Sias will augment, if it sees fit.
Such was the case when Sias – as well as the fund manager – issued a series of questions challenging the proposed merger of Mapletree Commercial Trust and Mapletree North Asia Commercial Trust, which eventually led to a revision of the terms of the merger that were more palatable to small shareholders.
The regulatory framework for Reits
What was interesting about the 2 cases cited above is that they were resolved satisfactorily without any regulatory intervention. But this was only possible because the regulatory framework has been fine-tuned to allow market players a major say in corporate actions, whilst granting regulators ample room for oversight.
Under current rules, directors of Reit managers have a duty to act in the best interests of unitholders and to prioritise unitholders’ interests over those of the Reit managers and their shareholders. In a merger or takeover situation, offeree Reit managers and their directors have the responsibility to properly evaluate the proposed terms and to carefully assess all relevant factors in deciding whether to support and present the proposal to unitholders.
In the context of a merger involving related Reits, the rules place the merger process only in the hands of non-conflicted directors. The sponsor and its connected parties are not allowed to vote on the merger, and the ultimate decision on the merger rests only with the independent unitholders.
Duty of directors
There is an overarching fiduciary duty on directors to act in good faith and in the best interests of the company or Reit. This point was made by Tan Boon Gin, the chief executive of the Singapore Exchange’s regulatory arm SGX Regco, in his latest Regulator’s Column.
Tan noted that SGX RegCo does not seek to exercise judgement on the commercial merits of transactions undertaken by companies but “will consider stakeholders’ concerns and, where appropriate, query companies to provide more transparency in their business decisions so that shareholders can make an informed investment or voting decision”.
He also reminded directors that they owe “a duty of undivided loyalty to the company” and should not place themselves in a position where the duty to advance the company’s interests may conflict with personal or other extraneous interests.
Perhaps most important is the point that directors should not simply rely on independent financial or legal advice when making their recommendations to shareholders without making their own assessment on the reasonableness of that advice.
The right mix
Achieving the right blend of market and official discipline is a delicate task, but one that is essential if a disclosure-based regime is to function properly in safeguarding the interests of investors.
With more minorities playing an increasingly active role in company affairs and with a regulatory framework that has been constantly fine-tuned to place shareholder interests at the forefront, the local market is on the right track.
- The writer is Mr David Gerald, Founder, President and CEO of the Securities Investors Association (Singapore)