[April 1, 2010]

For investors, it seems that the catch phrase nowadays is caveat emptor - or buyers beware. 

Retail investors bore the brunt of losses when CEOs of listed companies breached listing rules and absconded with the funds - these are recent headlines that frightened investors in S-chips.

Now, apart from S-chips, even award-winning small and medium enterprises (SMEs) are also being questioned on corporate governance issues.

The latest is the CNA Group, which was conferred the Enterprise 50 Award for three years consecutively - 2002, 2003 and 2004 - before the company was  listed in 2005. This prestigious annual award is given to Singapore's 50 most enterprising private companies and is jointly organized by Accenture and the Singapore Business Times, and supported by the EDB and International Enterprise Singapore.

In a Business Times report on March 30, listed CNA Group Ltd said the auditor for its 49.9% associate company Standard Water Ltd has resigned because of alleged "inconsistencies in documentation in a number of areas." The company said this has resulted in revenue overstatement of about 22 million yuan for FY2008.  The report said CNA Group Ltd's share of Standard Water Ltd's profit was $6.6 million and $10.3 million in FY2008 and FY2009 respectively.

In another Business Times story on the same day, the boss of  award-winning SME, Da Vinci Holdings, admitted in court - over a suit on franchising deals - that he has lied in an application for  a government grant for another firm of his.

In a move to beef up corporate governance in Singapore, the Monetary Authority of Singapore (MAS) has recently proposed more stringent rules for banks and insurers to promote more independence and expertise at board level.

Under the MAS proposals, a director will no longer be considered independent if he has served more than nine straight years on a board. Another proposal is to enlarge the number of independent directors on the board, nominating committee and remuneration committee from the current one-third to a majority.

Also, the MAS has proposed that financial institutions must set up a dedicated Board Risk Management Committee.

In pushing ahead these proposals, MAS officials consider it timely to strengthen the existing framework as the global financial crisis offers valuable lessons on corporate governance.

With these revised rules, the independence and competence of directors of financial institutions will be put under the spotlight of greater public scrutiny. MAS Deputy Managing Director, Teo Swee Lian, remarked: "Board and senior management must take responsibility to ensure that the institution has the competence and depth to put in place a robust governance culture."

Good corporate governance means that independent directors act not only as a check and balance to management and majority shareholders, but also protect the interests of the firm.

Earlier this year - on February 4 - the MAS announced a newly-established Corporate Governance Council, headed by Mr Alan Chan, CEO of Singapore Press Holdings. The council comprises senior lawyers, accountants and top representatives from the corporate and financial sectors.

The main objectives of the council are to promote higher standards of corporate governance in listed companies in Singapore, maintain investors' confidence and enhance the Republic's reputation as a leading and trusted international financial and investing hub.  Singapore, in fact, has won world-wide recognition for upholding high standards of corporate governance.  The World Economic Forum's Global Competitivess Report 2009 placed Singapore first in corporate governance standards in Asia.

In the wake of the recent global financial crisis, corporate governance practices in Singapore and other countries have emerged as a hot topic of discussion and analysis. For the past 18 months or so, the collapse of US investment bank, Lehman Brothers and the accounting scandal involving India's Satyam Computer Services have drummed home the need and urgency for good corporate governance.

Both Lehman and Satyam were companies listed on credible stock exchanges.  In September, 2008, Lehman was declared bankrupt following the exodus of most of its clients and drastic losses in its stock.

In March this year, a report released by a court-appointed US bankruptcy examiner revealed that Lehman Brothers had used controversial accounting techniques to artificially inflate its balance sheet by as much as US $50 billion.  In January 2009, Mr Ramalinga Raju, chairman of Satyam revealed that the revenue and profit figures of the company had been inflated for the past several years, prompting concerns about the firm's poor corporate governance practices.

Over the years, shareholders and investors (especially the "mom and pop" investors) have suffered losses worth many billions of dollars from major business scandals involving big companies as well as smaller ones. Corporate scandals in US and other countries have triggered off reform laws such as America's Sarbanes-Oxley aimed at tightening corporate governance rules. But despite the Sarbanes Oxley - corporate scandals haven't disappeared.

So have these tighter rules and regulations worked?

Exactly, what is corporate governance? Corporate governance is a set of rules spelling out the relationship among shareholders, management and a company's board of directors. And these rules influence how a company is run. Corporate governance handles issues arising from the separation of ownership and control.

Strong corporate governance standards lead to better access to capital and helps economic growth. Sound rules under corporate governance will foster values of fairness, transparency, accountability and responsibility to both shareholders and stakeholders.

Good corporate governance ensures that the business environment is fair and transparent and that companies can be held accountable for their actions. Conversely, weak corporate governance may result in waste, mismanagement and corruption.

Many years ago, the subject of corporate governance hardly cropped up in conversations among financial and business professionals. Now, in the aftermath of the global financial crisis and turmoil in many corporations, corporate governance has become a buzzword in financial, business and investment circles.

It seems to be taken more and more seriously by governments and professional and financial circles who have all paid much lip and paper service to the corporate governance concept.

Listed companies and other investment vehicles are paying ever higher costs of compliance to keep up with the governance rules.

But is this working? What can he done to restore confidence among investors as well as those in the management and boardrooms? 

The global financial crisis has driven home the message that board directors have to adopt a more active approach in monitoring the executive management of a company. The independent directors are expected to take care of the interest of shareholders and nip any brewing problems in the bud.

The post-crisis environment now demands changes in the way board directors perform their duties as well as the issues they grapple with. Their duties have become more onerous as they are becoming increasingly accountable for protecting shareholder interests - especially the minority shareholders.

The OECD, in a special report on corporate governance and the financial crisis, has drawn attention to the need of many financial institutions and companies to fine-tune or improve their guidelines on corporate governance. There is the pressing need to enhance the quality and composition of boards of directors.

A 2007 survey of 13 Asian countries revealed that most Asian jurisdictions had substantially revamped their governance laws and regulations after the wake-up call from the 1997 Asian financial crisis.

Pushing for more improvements, OECD will update its corporate governance guidelines for Asia ahead of its meeting in China during the second half of this year. Under the guidelines, one proposal is the role of boards of directors in encouraging growth of the risk management culture of financial service firms.

Another proposal is battling abusive-related transactions, where a party in control of a company enters into a transaction to the detriment of the non-controlling shareholder.

There is also the call for increasing the role of "whistle-blowing" to uncover corporate debacles. But there are skeptical views of this being effective - especially in Asia where employees are expected to obey their bosses.

In the years ahead, Asia and other regions will probably see stronger corporate governance as companies will learn and benefit from the lessons of the financial crisis, and take the necessary, at times, painful steps to rectify board and management faults and deficiencies. 

While there can be tighter and more draconian rules to enforce corporate governance and the costs of compliance and transparency gets higher and higher, corporate indiscretions can still persist.

One way of ensuring companies enhance governance is to educate shareholders to pressure companies to exercise good corporate governance.

Strong and persistent shareholder action or shareholder activism will play a key role in limiting corporate scandals. Shareholders must learn about their rights and how to manage and protect their own assets and investments and not leave it to others to take care of their interests.

Seriously, how much can governments really do to police every company and take care of each individual investor's interest?

It may therefore be timely for governments worldwide especially key financial centres to pay more attention to shareholder or investor education to prevent another global financial meltdown.