Date: September 24, 2018
The Honourable Mr K Shanmugam, Minister for Home Affairs and Minister for Law
Mr Daniel Teo, Chairman, SIAS
Mr J Y Pillay, Chairman, Singapore Council of Presidential Advisors
Mr Robert Jackson, Commissioner, U.S. Securities and Exchange Commission
Mr Carmine Di Noia, Commissioner, CONSOB, Italy
Mr Ong Chong Tee, Deputy Managing Director (Financial Supervision), MAS
Ladies and gentlemen
Good morning and a warm welcome to all of you.
A special welcome to our distinguished speakers from OECD, France, United States, United Kingdom, Italy and Hong Kong.
- Lehman’s crash and the Sub-prime crisis that pushed the financial system to the brink
Almost exactly ten years ago, on September 15, 2008, the US investment bank Lehman Brothers filed for bankruptcy, triggering what has now become known as the Great Financial Crisis or GFC as a result of the US Sub-Prime Crisis.
The root cause was indiscriminate housing loans to borrowers who were in no position to repay these loans. Ostensibly, the housing loans were to allow these sub-prime borrowers the chance to participate in a rising property market that had been boosted by a lengthy period of record-low interest rates and a strengthening economy. But, the truth is that banks created these sub-prime loans to boost their bottom lines and were happy to hide their activities in off-balance sheet entities.
A serious governance lapse!
If not for the extraordinary measures undertaken by the US Federal Reserve when it expanded its balance sheet by more than US$4 trillion, the global financial system could very well have gone under.
- The world is being disrupted
There are those that believe that major financial crashes occur roughly every ten years. Looking back at recent history, we can see some truth to this; after all the Asian Financial Crisis that gave birth to SIAS occurred in 1998 and this was followed ten years later by Lehman’s bankruptcy and the US Sub-Prime Crisis in 2008. Assuming that chronology holds true again this time, we have roughly three more months left of 2018 before the next financial disaster hits! [I pray not!]
All these talk of impending financial problems might be only of academic interest if not for the fact that not only are expert voices on the topic growing, but there are also many disturbing signs that the world is being disrupted in an unprecedented fashion, thus creating an investment and economic climate that is shrouded with vast amount of uncertainties.
- The governance challenges posed by disruptive forces:
3.1 Global warming
Global warming, for example, is triggering natural disasters with worrying frequency. Earthquakes in Lombok, Hurricane Florence and Typhoon Mangkhut recently wreaked havoc affecting thousands of lives across Asia and the US’ eastern seaboard.
Climate change and its effects are very real and it has the potential to wreak damage on countries that would take decades to fix!
Another worrying disruptive development is cyber-attacks. It is a global concern. In July, the Singapore government announced that its computerised healthcare records had been hacked and that the medical data for 1.5 million patients had been stolen, including Prime Minister Lee Hsien Loong’s medical data. SIAS, too, has not been spared.
3.3 Political change
On the political front, disruption also abounds: the first in June 2016 when the UK voted in a national referendum to leave the European Union, creating massive turmoil and uncertainties for UK’s and Europe’s politics, currencies and economies. This was soon followed by the election of a volatile and unpredictable businessman, Donald Trump, as the 45th President of the United States, an election outcome that very few had predicted.
With his “America First’’ emphasis, Mr Trump has overturned established global trade norms by withdrawing from the TPP or Trans-Pacific Trade Partnership, trying to redraw the North American Free Trade Agreement or NAFTA, and imposing large trade tariffs on several countries, including those in Europe but most notably, China.
He has also withdrawn the US from the 2015 Paris Agreement, claiming that measures to reduce carbon dioxide emissions and mitigate the effects of climate change on the global environment would hurt American workers and disadvantage the US economy. Very few agree with these claims but he is the President.
Analysts have drawn a parallel between Brexit and Mr Trump’s election – both are perceived to be protest votes against globalisation, the status quo and immigration. They also signify a shift towards greater protectionism and societies expressing a preference to look inwards instead of outwards. In short, for an economy like Singapore, which depends on free trade and countries opening their borders to the world, cross-border risks have risen considerably.
Here in Asia, the new government in Malaysia has already thrown up radical changes in the status quo, including the review of long term contacts and agreements that could have severe ramifications.
3.4 The rise of cryptocurrencies
In the financial markets, perhaps the greatest disruption comes in the form of the rise in popularity of cryptocurrencies like Bitcoin. Today, despite the fact that many central banks do not recognise such currencies and despite there being no fundamental backing for any of these currencies, there are an estimated 1,600 cryptocurrencies being traded and in circulation. Even though only a few are relevant and command the bulk of the market, disruption is present even in the currency market, where value is traditionally backed by fundamentals and supported by economic analysis.
What’s the link to governance, you might ask? More challenges and risks are posed by the rising incidence of disruptive forces If economies are at risk from trade wars and rising protectionism, how should we react? More importantly, are we prepared for the next crisis?
- Reforms following Lehman
The Lehman collapse and the contagion effect it had on the rest of the financial world saw governments enact legislation to prevent a recurrence, and regulators tightened Codes of Corporate Governance.
The US introduced the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 that introduced sweeping changes to the American financial regulatory environment which affected all federal financial regulatory agencies and almost every part of the nation’s financial services industry.
In Europe, regulators announced tough rules on how bankers could be compensated, including “clawback’’ provisions where pay could be reclaimed if subsequent events show that payments were undeserved in the first place. The UK, in a joint move with France and Germany in 2010, hit banks with an annual levy, the idea being that since the financial crisis began with banks, it was only right that banks contribute more to economic recovery.
Here in Asia, the effects were mitigated by the fact that companies and banks underwent major restructuring following the Asian Financial Crisis and were better prepared to weather the GFC. Nevertheless, legislations and regulations were revised with an emphasis of putting better risk management procedures in place, especially in financial institutions.
Notwithstanding the troubled history, change is inevitable and with it comes unpredictable outcomes. For example, the Trump administration, since taking office in January 2017, had rolled back some of the provisions of Dodd-Frank, the legislation introduced to rein in excessive risk taking by banks and to protect consumers. In March this year, the US Senate passed a bill easing financial regulations and reducing oversight for banks with assets below $250 billion. This has since been signed into law by President Trump, in May.
Will repealing Dodd-Frank lead to another financial crisis? Maybe it will, maybe it won’t. Experts however, think that another crash is only a matter of time. One school of thought which is growing in prominence is that the seeds for the next crisis were sown when the US Fed, in trying to prevent an all-out decimation of the global banking system ten years ago, slashed interest rates to almost zero and embarked on its large-scale “quantitative easing’’ or QE programme.
Some economists are now warning that offering the world what was essentially cheap debt, only encouraged excessive and indiscriminate borrowing and this has led to the inflation of huge amounts of debt around the world – one estimate puts global debt at three times global GDP. Imagine what would happen if that debt is not or cannot be repaid. Would restarting QE or cutting interest rates work again?
Nevertheless, we note that the US Federal Reserve has not only stopped its QE programme, but has also been raising interest rates over the past year. Higher rates mean that over-leveraged entities will face the possibility that they cannot repay their loans, thus raising the risk of a crash.
- Confidence is key and stronger governance is the way forward
One important part of whether or not we are prepared to cope with a new crisis depends very much on how strong our governance is, and whether we have installed sufficient safeguards. At the corporate level, this means putting in place a robust risk management system – having better internal controls and more checks and balance – to minimise the risk of failure.
We must install a culture that encourages the development of trust, integrity and transparency, three essential ingredients for any capital market to thrive; without them, there can be no confidence in the market. This is crucial because a big contributory factor to the Sub-Prime crisis was widespread loss of confidence.
One sure way to cushion the blow that could be delivered by another financial crisis is by raising the governance bar, uncompromising in adherence to corporate governance standards.
5.1 The role of Investors
One part of how Singapore can survive another crisis is investor education, which is now part of the toolkit, after large numbers of retail investors in Singapore suffered losses from buying Lehman-issued structured products. Investors need to understand the fundamentals of investing and are prepared for risks that commensurate with their net worth and financial position before parting their monies.
5.2 Constructive Shareholder Activism
Shareholders today are no longer passive; they are engaged and ready to act to influence, shape and change outcomes to achieve their desired results and returns. We also have Key Opinion Leaders who voice, write and blog about companies and corporate actions, drawing attention to questionable developments.
5.3 The role of SIAS
In this respect, SIAS is also stepping up our efforts, especially in times of corporate turmoil. The recent oil & gas crisis is one such example where we took on the cause of bondholders who found themselves stranded when many over-geared O&G companies faced perfect storms, unable to pay coupon and repay the notes. SIAS organised townhall meetings with independent professional advisors to help bondholders understand the issues and rights. We also organised steering committees and facilitated discussions with the issuers on their debt restructuring.
SIAS has also intervened in recent shareholder and boardroom disputes as in Sabana REIT, Noble, Hyflux, Datapulse, Yuuzoo and others.
We do this, with the aim of facilitating a win-win for all stakeholders.
SIAS is also intensifying its efforts in investor education, equipping a wider cross-section of the community to be informed and be prepared for any eventuality. We are working with Peoples’ Association with community education, especially on educating seniors to better manage their monies and, importantly, avoid financial abuse. For the youths, SIAS is working closely with universities, supporting the students and investment clubs by providing independent investor education courses that teach them the importance of starting to invest early and understand features and risks of the various investment instruments.
For retail investors, SIAS has commenced analyses of annual reports, to pose questions on company’s business strategy, financial performance and, more importantly, corporate governance. Shareholders can use these questions at AGMs to seek accountability and ratchet up the quality of discussions. Through this initiative, investors can better monitor their investments and raise the transparency of companies.
Given the past experiences arising from disruptions, perhaps it is timely for SIAS and its partners, in due course, to consider the feasibility of establishing an institute to focus on enterprise, investments and governance to guide investors in the future, helping them to be future-proof.
In conclusion, I would like to urge companies and investors to be prepared for the next crisis, even though I personally pray that we would be spared the pain and suffering of another catastrophic meltdown. That is why conferences like this are essential as they give decision-makers, regulators, investors and companies the platform to focus and discuss important issues whilst considering the risks that lie ahead.
The main question for this year’s conference is whether “Corporate Governance – helps or hinders” business performance. I am sure the answer is obvious; nevertheless we look forward to robust and invigorating discussions.
Thank you. Enjoy the conference.