Commentary – Raising governance standards of smaller companies on SGX will benefit retail investors

Date: November 28, 2025

First published in Straits Times on 27 November 2025

Corporate governance standards are improving, but the gains are uneven, with smaller companies trailing bigger players, according to data by the Securities Investors Association (Singapore), or Sias.

This is not surprising because while blue-chip companies such as those on the Straits Times Index (STI) have generally embraced governance reforms – driven by greater public scrutiny, the need to compete for international capital, analyst coverage, and institutional ownership – smaller companies often struggle to match these standards.

For these companies, limited resources, lean management teams, and a focus on survival rather than compliance mean that governance practices often take the back seat. Yet, improving governance among small companies is critical, both for their own long-term sustainability and for the health of Singapore’s broader capital market ecosystem.

Furthermore, given that the authorities are looking to stimulate interest in companies beyond the 30 components of the STI, it begs the question – what can be done to raise governance standards among smaller companies to justify increased investor interest?

Why the gap exists

The reasons for the governance gap are multi-faceted and in some instances structural, starting with the fact that small companies typically have fewer independent voices at the board level.

Instead, their boards tend to be dominated by founders, family members, or close associates, resulting in limited oversight and accountability. In many cases, the roles of chairman and chief executive are still combined, blurring the line between governance and management.

Second, compliance and governance are often seen as cost centres rather than value creators. Smaller companies often do not have in-house internal audit or investor relations functions, while the cost of engaging external consultants to provide these services or hiring experienced independent directors can seem prohibitive.

This leads to a “tick-the-box” mentality – complying only with the bare minimum required under Singapore Exchange (SGX) rules, rather than embracing governance as a strategic advantage.

Third, external policing – or the lack of it – plays a role. Larger companies are well covered by analysts and institutional investors who keep managements on their toes, but smaller companies, by contrast, tend to be under-researched and thinly traded. With less public visibility, there is less market pressure to maintain high governance standards.

Finally, there is a cultural dimension. Many small business owners may still regard their companies as extensions of their personal empires. Relinquishing control or inviting external scrutiny can feel uncomfortable, especially when governance is seen as interference rather than guidance.

Why governance matters

However, ignoring governance comes at a cost. Poor board oversight can lead to weak risk management, related-party transactions that raise red flags, or lapses in disclosure that erode investor trust and lead to share price underperformance.

Smaller companies should recognise that good governance can be a powerful differentiator. A company that demonstrates transparency, sound internal controls, and an independent-minded board can attract long-term investors and command a valuation premium.

Governance is not merely about compliance. It is about building a framework for sustainable growth and resilience. The mindset that boards and management should seek to inculcate in their corporate culture is very simple: good governance means good business, resulting in better performance.

To begin with, under the latest Equity Market Development Programme announcement, the Monetary Authority of Singapore will provide funding to train personnel within smaller listed companies that do not have an effective investor relations function to build more effective investor relationships through better communication initiatives.

This is an admirable first step by the regulator to help generate interest beyond the blue chips. The ball is now in the court of these companies which badly need to tell their growth stories to investors.

Like any corporate initiative aimed at raising shareholder value, it is crucial that efforts to raise governance standards must start from the top, since it is the board that sets the tone for any major corporate strategy thrust.

A starting point would be for smaller companies with weak Sias corporate governance scores to recognise that they have a problem and that something needs to be done. Family-run boards, for one, should try to ensure a strong professional and diverse element within their ranks while studying ways of replacing family members with individuals who are truly independent.

They should appoint only those who are accredited by the Singapore Institute of Directors, which would then provide the market with a baseline assurance of directorial competence.

Simplifying governance frameworks

While the Singapore Code of Corporate Governance sets out best practices, many smaller listed companies find it daunting to satisfy all the requirements fully.

The authorities could consider developing a “proportionate governance code” – a simplified framework tailored to smaller companies that captures the spirit of governance without overburdening them with red tape.

In this regard, perhaps study should be given to Britain’s Quoted Companies Alliance (QCA) Corporate Governance Code, which is tailored for small- to mid-sized companies and is used by almost 900 companies whose shares are traded on London’s Alternative Investment Market, the Main Market and the Aquis Stock Exchange, and by private companies which may opt to float in the future.

Introduced in 2013, the QCA Code was revised in 2018 “to provide clear and practical guidance for small and medium-sized public companies and help them achieve sound corporate governance”.

The QCA Code is a more flexible, principles-based framework designed for smaller companies, while the main UK Corporate Governance Code is a more prescriptive, “comply or explain” code aimed at larger companies with a premium listing.

The QCA Code is tailored to growth-focused businesses and allows for easier adaptation, whereas the UK Code is seen as more burdensome for smaller companies.

Working with the mainstream media

There is currently insufficient media coverage of small- to mid-sized companies in the mainstream media. Furthermore, many are not covered by research analysts.

Surely the SGX could work with the local media to sponsor programmes featuring lesser-known, smaller companies. After all, many retail investors are interested in good-quality, affordable small-cap stocks.

These could take the form of corporate profiles that include excerpts from annual reports, and, where available, research reports by brokers could also accompany these profiles.

Once these companies become better known to the public and attract greater scrutiny, they would then have a natural incentive to raise their governance standards or lose out to their peers.

The market should reward companies that demonstrate commitment to governance. Instead of focusing only on financial performance, broking company analysts could start incorporating governance considerations into their investment recommendations.

After all, a well-governed firm would be less likely to fudge its numbers and more likely to produce financial statements that could be truly relied upon. Moreover, such companies would also be less likely to indulge in dubious, off-the-books transactions that would damage shareholder value.

Last but by no means least, broking company reports are fundamentally aimed at alerting readers to companies worth investing in – or not.

Surely, major determining factors should be the quality of the management, how well a company treats its shareholders and how transparent it is – which are all major governance considerations.

• The writer is Mr David Gerald, Founder, President and CEO of the Securities Investors Association (Singapore)