Date: December 29, 2016
The Governance Evaluation for Mid and Small Caps (GEMS) analyses the corporate governance practices of mid and small cap companies of not more than S$500 million listed on the Main Board or Catalist of the Singapore Exchange (SGX), representing about 80% of the all companies listed on SGX. It addresses the limitations of existing corporate governance indices in several respects. First, it evaluates corporate governance practices over three years rather than on a yearly basis. Second, it focuses on observable, quantifiable and verifiable metrics that reflect actual corporate behaviour, rather than mere disclosure of policies, practices or intent to adhere to corporate governance best practices. This addresses concerns that disclosures often reflect form rather than substance and may not reflect what is actually practised by the company. Third, unlike existing corporate governance indices, GEMS is developed specifically with mid and small cap companies in mind. It focuses on factors of importance to such companies, such as stability of ownership and succession risk. Fourth, it recognises the importance of regulatory risk on the protection of minority shareholders, and therefore uses indicators that differentiate companies on such risk.
This year, in the third review of GEMS, we observe a further drop in the in the overall average scores from 67.6 in 2014 to 66.8 in 2015 and 66.5 in 2016, out of a total possible score of 100. Analysis of the various sections of the scorecard reveal that, Remuneration and Interested Party transactions registered the most significant decline with the average score falling to 5.8 in 2016 compared to 6.2 in 2015 and 7.2 in 2014, out of a possible total of 15; Board and Management scores saw a slight decline with the average score falling marginally from 23.2 in 2015 to 23.1 in 2016 out of a total possible 30. Quality of Financial Reporting and Internal Controls saw a slight improvement in score from 12.2 in 2015 to 12.3 in 2016. Other factors assessed include Ownership, Shareholder Rights and Communication and Regulatory Risk remained relatively constant. In total, 359 companies were scored in 2016 and companies under regulatory action, suspension, delisting and those under the SGX watch list (excluding those for not meeting the MTP rule) were excluded from the research.
The review also identified a few trends:
1. More substantial shareholders selling down their stakes
There was an increase of 20% in the number of SMEs whose substantial shareholder had sold off shares amounting to 20% or more over the last 3 years. This could be due to more takeover bids and prices of the shares remaining depressed.
2. Increase in the number of long serving independent directors serving more than 9 years on the board
The Singapore Corporate Governance Code Guideline 2.4 states that “the independence of any director who has served on the Board beyond nine years from the date of his first appointment should be subject to particularly rigorous review. In doing so, the Board should also take into account the need for progressive refreshing of the Board. The Board should also explain why any such director should be considered independent.”
It was found that an increasing number of SMEs had at least one independent director serving 9 years or more over the last 3 years, up from 42.7% in 2014 to 50.7% in 2016.
3. More qualified and experienced management but remuneration not disclosed
85.8% of SMEs has the CEO with at least 10 years of experience in the industry or related industry, up from 82.1%; but many did not disclose their remuneration. Only 5 companies, or 1.4%, disclosed remuneration of key management.
4. Fewer companies maintained or increased dividends over the last 3 years
Only 25.3% of SMEs maintained or increased dividend pay-out over the last 3 years. This is a fall from 32.9% in 2014 and 27.5% in 2015, perhaps reflecting the economic situation and the impact to profitability. Nevertheless, lesser companies are now not paying any dividends; 30.1% of SMEs did not pay any dividend in the last 3 years. This is a fall from 32.9% in 2014 and 33.9% in 2015.
5. Majority of SMEs listed in Singapore are incorporated in the country of operation or country of listing
In assessing regulatory risk, 89.4% of SMEs reviewed are incorporated in the county of operation or country of listing, thus they are subjected to the core legislative requirements of the respective countries. In addition, 85.5% of these SMEs operate in countries that fall within the top 25% of World Bank’s Worldwide Governance indicators. These countries, with strong rule of law, provide better safeguards for investors.
“Independent directors with more than nine years tenure will continue to grow as more listed SMEs mature. Should companies relook at the independence of each independent director with a new set of guidance to their Nominating Committee for a more stringent and comprehensive robust assessment?
It is hoped that those in charge of governance will consider using this GEMS scorecard as a means to monitor and track the corporate governance practices in their respective entity with an aim to raise the bar of good practices.” Mr Lawrence Kwan, CSIS
“Corporate governance is a journey and from this year’s results of the GEMS research, it definitely highlights the need to continue to push boundaries to improve corporate governance standards among our SMEs. To this end, SIAS has also embarked on its analysis of annual reports and posing a minimum of 3 questions on the annual report. This is to improve the quality of annual general meetings by raising relevant questions specific to the company. This exercise also helps focus discussions at shareholder meetings and help companies to provide better accountability to shareholders. 200 companies will be reviewed in the first year,” Mr David Gerald, President and CEO, SIAS
“To the best of our knowledge, GEMS remains the only scorecard in the world that is designed specifically to rate the governance of listed SMEs. Given the importance of SMEs to the growth in our market and in the region, it is important that SMEs focus on areas of governance that are important for them to create long-term sustainable value. It is encouraging to see some of our SMEs faring well on GEMS but many others can do much better. While we have continued this year to only highlight the top performers, we will eventually publish the entire ranking from the best to the worst. I hope to see other initiatives, including those that leverage on GEMS, that encourage and incentivise listed SMEs to raise their governance standards,” Prof Mak Yuen Teen, NUS Business School
The top GEMS rated companies scoring 80 and above, in alphabetical order are:
Banyan Tree Holdings Limited, BBR Holdings (S) Ltd, CEI Limited, Chew’s Group Limited, Cordlife Group Limited, Dynamic Colours Limited, Gaylin Holdings Limited, GSH Corporation Limited, Hi-P International Limited, Hong Leong Asia Ltd., Hotel Royal Limited, Hwa Hong Corporation Limited,, Hyflux Ltd, Lum Chang Holdings Limited, Micro-Mechanics (Holdings) Ltd., Multi-Chem Limited, Nera Telecommunications Ltd, Old Chang Kee Ltd., Qian Hu Corporation Limited, Rotary Engineering Limited, Ryobi Kiso Holdings Ltd., Sin Heng Heavy Machinery Limited, Sing Investments & Finance Limited, Singapore Reinsurance Corporation Limited, Soup Restaurant Group Limited, Stamford Tyres Corporation Limited, Tai Sin Electric Limited, Tuan Sing Holdings Limited, UMS Holdings Limited, Uni-Asia Holdings Limited.
The Governance Evaluation for Mid and Small Caps (GEMS), is developed in collaboration with SIAS and CSIS, under the guidance of Advisor, Assoc. Prof Mak Yuen Teen of NUS Business School, and first launched in April 2015. Handshakes, an innovative data analytics platform to the capital markets, is a partner and sponsor to this project. GEMS is designed to better assess and rate the governance of small and medium enterprises (SMEs) as what is most important to the governance and long-term success of such SMEs may be different from large companies.
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, a registered Charity and Institution of Public Character, 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 1000 investor education programmes ranging from basic investment seminars for novices to certificate courses for investment savvy investors. Thus far, about 150,000 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 Chartered Secretaries Institute of Singapore (CSIS)
CSIS, formerly known as 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 CSIS 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.
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.
Founder, President & CEO
Securities Investors Association (Singapore)