New Governance Rating For SGX Listed Small & Medium Enterprises

Date: April 8, 2015

GEMS Scorecard | GEMS Findings

Small and medium enterprises (SMEs) of less than S$500 million represent about 80% of the companies listed on SGX. They, therefore, constitute an important part of our market. What is most important to the governance and long-term success of such SMEs may be different from large companies. For example, having a committed large shareholder who stays invested in the SME, a CEO or executive chairman with significant experience in the industry, and having a potential successor who is familiar with the company, may be especially important to SMEs. Further, there is a significant number of foreign issuers with a primary listing on SGX which are SMEs. The governance and regulatory risks of foreign issuers can differ depending on their country of operation and country of incorporation, and may also differ from domestic SMEs.

Given these differences between SMEs and larger companies, existing governance ratings methodology, which applies the same criteria for evaluating the governance of large and small companies, may not be sufficiently useful for assessing the governance of SMEs. Current governance ratings also assess companies primarily based on their disclosures of governance practices over a one-year period. There is, therefore, a need for a more practical and relevant governance rating methodology to provide guidance to investors and to more accurately reflect the practices of SMEs.

This gave rise to the development of the Governance Evaluation for Mid and Small Caps (GEMS), which is a methodology for evaluating the governance of listed SMEs. It is a collaboration between the Securities Investors Association (Singapore) (SIAS) and The Singapore Association of The Institute of Chartered Secretaries and Administrators (SAICSA), together with Associate Professor Mak Yuen Teen as the advisor. Handshakes, an innovative data analytics platform to the capital markets, is a partner and sponsor to this project.

GEMS evaluates the corporate governance practices of SMEs over three years rather than on an annual basis. The criteria include governance indicators not incorporated in other governance ratings, including those particularly important to SMEs and focuses more on measures and indicators that reflect actual behaviour and actions, rather than disclosures, e.g.:

  • Whether the largest substantial shareholder has over the last 3 years sold down more than 20 percent of his or her stake
  • Whether major shareholders/key officers engage in frequent trading of shares
  • Experience of CEO in the industry and whether there is another member in the senior management team with sufficient experience in the company to step up
  • Regulatory risk, which affects protection of minority shareholders
  • Whether changes in executive and directors’ remuneration are linked to changes in return on equity (ROE) and total shareholders’ return (TSR)
  • Dividend payments and policy

GEMS is not a lower benchmark, but different benchmark that is more relevant to SMEs.
In compiling the 2014 rankings, information from annual reports and announcements published on SGX was used to assess these companies against the scoring criteria. Database information from Handshakes was also used to ascertain the relationships between directors and substantial shareholders vis-à-vis one another.

There are certain sections within GEMS in which the companies assessed performed generally very well in for the 2014 rankings. For instance, 96.3% of the assessed companies did not have two or more independent directors resigning or retiring without seeking re-election after serving 3 years of less. 97.9% of the assessed companies did not have more than 2 changes for each key officer position over the 3 year assessment period. 94.9% of the assessed companies had at least one key officer (other than executive chairman, chairman or CEO) who has been with the company for more than 5 years.

However, there are still areas for improvement. For 65.2% of the assessed companies, a substantial shareholder who is unrelated to the board, management or other substantial shareholders could not be found over the 3 year assessment period. 78.0% of the assessed companies did not have a single independent director who possessed industry experience. Further, 60.7% of the assessed companies failed to provide the contact information of their investor relations personnel on their annual reports or websites.

  • The top 10% of the companies assessed for the 2014 rankings include: 800 Super Holdings Limited, Ban Leong Technologies Limited, Banyan Tree Holdings Limited, Boardroom Limited, Breadtalk Group Limited, CEI Contract Manufacturing Limited, CH Offshore Limited, Chew’s Group Limited, Chuan Hup Holdings Limited, Cortina Holdings Limited, Cosmosteel Holdings Limited, Dynamic Colours Limited, Ellipsiz Limited, EnGro Corporation Limited, Fabchem China Limited, Fischer Tech Limited, FJ Benjamin Holdings Limited, Global Palm Resources Holdings Limited, Hafary Holdings Limited, Hi-P International Limited, Hiap Seng Engineering Limited, Hotel Royal Limited, Hupsteel Limited, Isetan (Singapore) Limited, Japan Foods Holdings Limited, K1 Ventures Limited, KSH Holdings Limited, Micro-Mechanics (Holdings) Limited, Mirach Energy Limited, Old Chang Kee Limited, Penguin International Limited, Qian Hu Corporation Limited, Regal International Group Limited, Rotary Engineering Limited, SBS Transit Limited, Singapore Reinsurance Corporation Limited, Singapura Finance Limited, T T J Holdings Limited, Teho International Inc Limited, Tuan Sing Holdings Limited and UE E&C Limited.
  • “Having being involved in developing a number of corporate governance ratings and scorecards, I felt that they generally rely too much on just disclosures by companies and do not sufficiently differentiate between what is important for SMEs compared to large companies. Given the dominance of SMEs amongst the listed issuers in Singapore, this is an important initiative. We hope that GEMS will inspire greater confidence amongst investors in some of our exemplary SMEs and encourage other SMEs to improve their governance. To the best of our knowledge, this is the first such attempt internationally to have a governance rating specifically targeted at SMEs,” Associate Profession Mak Yuen Teen.

“This is an important initiative for SIAS.  Many retail investors are invested in medium and small caps, which represent the 80% of the companies listed on SGX. With this research, investors are better able to make informed decisions about the companies they invest in and also help them identify well run companies. Past experience shows that corporate governance failures occur mainly amongst SMEs. With this research and rating, it will no doubt be of tremendous value to all investors”, David Gerald, President and CEO, SIAS.

“SAICSA’s involvement with GEMS stems from a desire to elevate the profile of company secretaries in Singapore, and for company secretaries to be recognised as professionals carrying expertise in corporate governance matters. GEMS is a unique collaborative effort between SAICSA, a professional body representing company secretaries, and SIAS, an association representing investors. The common aim is to see that SME companies strive to exceed their current corporate governance standards beyond mere compliance with the letter of the law”, Lawrence Kwan, Chairperson, SAICSA Corporate Governance Advocacy and Research Taskforce.
About Prof Mak Yuen Teen
Prof Mak is Associate Professor of Accounting at the NUS Business School where he teaches corporate governance and ethics. He has served on committees developing codes of corporate governance of listed companies and charities. He has also served on the boards of large not-for-profit organisations and on audit advisory committees of UN agencies in New York. Prof Mak has chaired or served on judging panels for corporate governance-related awards here and overseas. He has also played key roles in the development of a number of corporate governance scorecards and ratings. Prof Mak is frequently described as a corporate governance advocate for his work in promoting good corporate governance here and overseas since the late 1990s.

About Securities Investors Association (Singapore) (SIAS)
SIAS is the largest organised investor lobby group in Asia, with almost 71,000 retail investors as members. It is run by a Management Committee comprising of professionals who are volunteers. It actively promotes Investor Education, Corporate Governance and Transparency and is the watchdog for Investor rights in Singapore. To-date, SIAS has since year 2000, successfully organized over 700 investor education programmes ranging from basic investment seminars for novices to certificate courses for investment savvy investors. Thus far, more than 80,000 retail investors have benefited from these programmes, which are offered largely free. Members are educated on the features of investment products, and the attendant risks involved in each product. Investors are taught to make informed decisions on investing. SIAS is able to provide a variety of investor education programmes to its members and the investing community at large through collaborative arrangements with financial institutions and listed companies interested in investor education as part of its corporate social responsibility agenda.

About Singapore Association of The Institute of Chartered Secretaries (SAICSA)
The Singapore Association of The Institute of Chartered Secretaries (SAICSA) was founded in 1961 to promote and advance effective governance and administration of organisations in the private, public and non-profit sectors through the continued development of corporate governance and corporate secretarial administrative best practices. Members of SAICSA can be found in various organisations such as corporate secretarial firms, legal firms, international accounting firms, multi-national corporations, public listed companies, government departments and statutory boards.

About Handshakes
Handshakes is a data analytics company that provides quick and convenient access to curated data about companies and the people who run or own them.  Handshakes offers integrated information from thousands of disclosure documents in the public domain, and technologies to intuitively analyse and present qualitative information.  Handshakes was founded by ex-regulators with a vision of making information more accessible and markets more transparent for investors.