Opening Address by Mr David Gerald, Founder, President & CEO at 16th Investors’ Choice Awards Dinner Presentation Ceremony 2015

Date: October 15, 2015

“Improving investor protection in Singapore”

Mr. Chan Chun Sing, Secretary-General, NTUC and Minister, Prime Minister’s Office

Mrs Lim Hwee Hua, Chairman, SIAS

Distinguished Guests, Members of SIAS, Corporate Friends, Members of Media, Ladies and Gentlemen

Tonight, we celebrate our 16th anniversary and will recognise the winners of our Investors’ Choice Awards 2015. Currently, SIAS represents about 71,000 retail investors. We are now a Charity and an Institution of Public Character (IPC). We intend to do more for our community to prepare them for their retirement. Membership to SIAS is now a dollar per month to allow every Singaporean the opportunity to benefit from our programmes. So please join us.

This week, we have been busy discussing corporate governance issues with all stakeholders including regulators. CG professionals such as lawyers, accountants, directors, senior managers, investor relations personnel and investors, both institutional and retail, participated in the Global Corporate Governance Conference, Corporate Governance Forum and Workshops, and Investor Forum. Those of you who had participated in these programmes would have experienced lively and thought provoking sessions. We were fortunate to have 30 outstanding thought leaders from United States, United Kingdom, Germany, Australia, Hong Kong, Malaysia, and, of course, Singapore. It was a resounding success.

Protection through Education

Since inception, SIAS has actively promoted the importance of investing and has educated about 140,000 Singaporeans through over 1000 Investor Education programmes. It is our mission to strengthen the financial well-being of Singaporeans. On the average, we have been providing about 65 investor education programmes annually for citizens from all walks of life.

However, many Singaporeans are still not investing for want of knowledge or fear of investing. About S$53 billion lies in deposits earning nominal interest which is wiped out by inflation. A recent study by TNS Research, commissioned by Eastspring Investments highlighted that only 56% of Singaporeans aged 45-55 are actively preparing for retirement despite being close to average retirement age. So a large group still remains unprepared. There is, therefore, a heightened need to embark on a widespread investor education to educate this group of citizens.

It is our concern that senior citizens, in particular the retirees, some of whom are not able to manage or not managing their money well. They are a vulnerable group, an easy target for financial abuse by product pushers or well-meaning close relatives, who volunteer to act as “investment advisors”, and unfortunately often lose it all for them. Therefore, since the last quarter of 2014, SIAS, in collaboration with People’s Association, has been providing the programme “Understanding Money for Senior Citizens”. This programme is designed to help senior citizens to manage their money and avoid financial abuse. To-date, we have conducted this programme in 16 community centres. It is receiving strong support. Minister, we would be happy to provide this programme to your NTUC members, who are retiring or retired. Free of course.

We are not only mindful of the needs of the senior citizens but have also been actively providing programmes for the youths, the investors of tomorrow. We have a Youth Chapter that provides activities to Universities and Polytechnic students. About 3000 youths have joined us. We will relentlessly pursue our objective of helping our citizens of all ages to prepare them to meet their financial goals through our extensive investor education programmes.

Protection through good corporate governance

Some ask why SIAS is advocating good corporate governance. For those who do not quite understand our role, investors must have the comfort of knowing that the board and senior managers would manage their investments with high standards of ethics and good governance. It has been well recognized by OECD and various studies that it is the investors should play a meaningful role in driving good corporate governance. According to Monks and Minow, “Shareholders are often described as owners of corporations” meaning that owning shares in corporations tantamount to owning any other property. Shareholder activism can discipline an unruly corporate system.

Companies with good corporate governance also have good performance. Our study of the award winners’ market performance for the last 5 years, found that collectively, they have outperformed the STI index. These companies are, no doubt, of investible standard.

Investor protection was the main reason for the origin of SIAS is well documented. Investor protection has remained our hallmark. In pursuing our mission to protect investors, we have been mindful of the need to maintain investor relations peace in Singapore. Hence, our preferred stance of “In the boardroom and not in the courtroom” in resolving shareholder disputes, unless we are snubbed or challenged. We have helped thousands of shareholders stranded in corporate debacles.

Empirically, strong investor protection is associated with effective corporate governance, as reflected in valuable and broad financial markets, dispersed ownership of shares, and efficient allocation of capital across firms. Therefore, it is with this aim in mind that SIAS continues to advocate good corporate governance practices and framework. This would not have been possible without the proactive stance of the MAS and ACRA to regularly review regulations with the objective of improving investor protection.

The latest initiative by SGX to improve the quality of the market by setting minimum trading price, and the proposal by MAS to regulate alternate investments in future, to provide greater investor protection, are laudable initiatives. We accept that there is only so much the regulators can do in a caveat emptor market, i.e. buyer beware. Therefore, as an investor body we understand that investors must make informed decisions. Investing without knowledge is a gamble. We accept that the market also cannot be over-regulated which would deter issuers from choosing Singapore as a listing destination. A fine balance is, therefore, needed between regulation and protection.

Currently, we have two boards. The Catalist board fashioned after AIMS UK, and the Mainboard. Catalist is a sponsor regulated regime. The difference between a sponsor regulated regime and an exchange regulated regime, is that the sponsor is closer to the company. These market professionals, being closer to the company, understand the Board well and have relationships with the senior management; they understand the business strategy and how the Board expects it to be executed. Therefore, when the companies are conducting corporate actions, the sponsors already understand the rationale and the process of execution becomes more efficient and economical. It is, therefore, no surprise that there have been no major scandals or catastrophes in Catalist companies, thus far.

If a sponsor regulated regime is effective, why not consider extending it to the Mainboard? Because it is there that investors have experienced major problems in the past. To mention a few catastrophes – China Sky, Blumont, Asiasons, LionGold and others. Can we use this regulatory approach to international companies or foreign listings?

The opponents to this idea argue that it is fundamentally flawed because that would amount to discrimination. That would also be against the fact that we are an open economy and would be sending a wrong message to international companies wanting to list here. So then, how do we ensure greater protection for investors investing in companies on the Mainboard, boosting their confidence? Allow me to share a few ideas:

1. Compliance Advisor

One way would be to require all new companies listing on the Mainboard hereafter to engage a compliance advisor for a period of at least two AGMs, to enable the Board to be familiar with our market requirements on governance, risk management and internal controls. This should be part of the listing cost for the services provided by the listing manager. Whether the company will thereafter continue with this service, would very much be a Board decision. I would suggest that the listing or issue managers should continue to provide the compliance services as, firstly, it is their responsibility to bring quality companies to our Mainboard; and secondly, they understand our local governance requirements better. If this suggestion could be accepted, investor protection will get a further boost.

2. Mandatory Internal Audit

Whilst most corporate leaders are honourable and can be trusted, there will always be a few who, due to greed or selfish motives, cause losses to investors through unlawful interference. Investors, therefore, need someone within the Organisation to be their eyes and ears to prevent it happening. Investors need the comfort of knowing that a professionally-trained person within the Organisation full-time is there to point out any wrongdoing or give early warning signal to the CEO and/or the Chairman of Audit Committee.

Indeed the Singapore Code of Corporate Governance, Principle 13, calls for a company to establish an effective internal audit function that is adequately resourced and independent of the activities that it audits but it does not prescribe for a full-time internal auditor nor is it mandatory. It is already the mandatory requirement in some jurisdictions for listed companies to appoint a full-time internal auditor. We should consider doing the same.

The audit committee of the board is an important structure of a listed company but the basic problem of the committee is that no matter how competent the members, they cannot devote full time effort to the company and cannot meet regularly. Companies should adopt the COSO¹ framework for internal controls and risk management. SIAS is a strategic partner of the COSO Academy and supports the adoption of COSO by all listcos.

Frederick D. Lipman and L. Keith Lipman on ‘Corporate Governance, Best Practices’ suggest perhaps management should look at internal audit as a substitute for scandal insurance. “If scandal insurance were available (which it is not), many companies would purchase it if the premium cost were reasonable. Internal audit cost should be viewed as a form of insurance. In fact, effective internal auditing, both operational and strategic, can save the company enormous amount of money in uncovering duplication, waste, errors and wrongdoing in the company.”

This suggestion is especially useful to Directors in view of Listing Rule 1207 which requires the Board to provide an opinion on the adequacy of internal controls addressing financial, operational and compliance risks of the company.

What else can be done to enhance investor protection?

3. Separation of Dual Role of SGX

There have been debates in the media, and expectation from investors, over the potential conflict between the SGX”s dual role as a profit-making company accountable to its shareholders and its regulatory functions.

Currently, SGX is one of the last few major bourse operators still clinging on to its regulatory functions. Other international financial centres, such as Hong Kong, Australia and London, have established separate regulatory bodies to oversee their stock markets, years ago. Most ASEAN countries too have done the same.

In his ST article in January 2015, Goh Eng Yeow asserts that “whatever the merits of the SGX retaining its regulatory role, it would only be prudent to streamline some of the regulatory functions now undertaken by the bourse and its regulator, the Monetary Authority of Singapore.” The article highlights the market surveillance activities mounted against manipulation of stock prices discussed in the SGX”s Regulator Column; “Even though the exchange is the frontline watchdog guarding against share price rigging, it has no enforcement power to bring wrongdoers to justice. As the regulatory column itself noted, the SGX “does not possess the police-equivalent powers to call for records or interview potential suspects in its investigative activities”. Instead, it has to pass any suspicious findings to the MAS and the Commercial Affairs Department and rely upon them to take action.“

Could investors” interests be better served if the SGX”s surveillance department is directly overseen by an independent watchdog under MAS? Could such a streamlining of regulatory functions have helped in averting the losses suffered by investors when Blumont, Asiasons and LionGold crashed 2 years ago, causing over $8 billion in market value to evaporate in days? Ultimately, the question is, can a policeman do business with whom he polices’?

Whilst it is hard to say, but such a move could bolster confidence in SGX on its efforts mounted to curb manipulation in share prices and help silence the complainants on the conflict of interest faced by the SGX in balancing its profit-making and regulatory roles. I am inclined to support this view and I have made my views known earlier.

Improving Board accountability

To raise the standard of corporate governance further, SIAS intends to assist shareholders seek accountability, in critical areas, from the boards. SIAS proposes, to pose at least a minimum of 3 questions on every annual report commencing with the companies which are low on the governance rating. The questions will focus on the company strategy, financial statements and their corporate governance practices. The aim is to improve the quality of annual general meetings by raising relevant issues specific to each listed company. This exercise will help focus discussions at shareholder meetings and help companies to provide better accountability. This will help all shareholders and companies. To achieve this, we would need to raise an additional $1 million annually. With your help, I am sure this will materialise.

With the reduction in board lot size from 1000 to 100 and the introduction of multiple proxies, which will enable investors using their CPF monies who invest in shares to attend AGMs, companies could potentially see more retail investor participation at AGMs. With AGMs bunching in the last week of April, making it difficult for investors to attend AGMs, the questions posed by SIAS for boards to address to investors would also certainly help alleviate any concerns on the part of companies. We recommend that companies webcast their AGM proceedings.

The questions we will raise will supplement the work SIAS currently does to help retail investors seek accountability from the companies. We have been training investors to understand the annual reports. SIAS currently produces independent video commentary on selected Listed Companies’ Annual Report thereby educating shareholders and highlighting the area of concerns to help them make informed decisions and participate better at AGMs.

These suggestions, we believe, go a long way to improve the corporate governance ecosystem in Singapore that would ultimately protect the investments of our citizens.

This year, to encourage the spirit of philanthropy and giving, as part of Singapore”s 50th year, donors will get a tax deduction of 300 per cent the amount they donate in 2015. This means that for every $1 you donate to SIAS, $3 will be deducted from your taxable income for the year. Your support will go a long way to help SIAS to do much more for the community to help them manage their financial affairs. Please donate generously.

Tonight we celebrate the excellent work you have done in governance and transparency. We also reward retail brokers for their good efforts to support retail investing and financial journalists for their insightful stories impacting on retail community.

I thank our Guest of Honour, Minister Chan Chun Sing, for kindly gracing our event. I thank all our donors, sponsors of the event, table sponsors, and the 121 organisations who readily came forward to join the Statement of Support to re-affirm their commitment to upholding good corporate governance. Thank you all for coming.

Last but not least, I thank my staff for their hard work and making this event a success.

Enjoy the evening!

¹The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is a joint initiative of five private sector organizations, established in the United States, dedicated to providing thought leadership to executive management and governance entities on critical aspects of organizational governance, business ethics, internal control, enterprise risk management, fraud, and financial reporting. COSO has established a common internal control model against which companies and organizations may assess their control systems.