Speech By Mr Tharman Shanmugaratnam, Deputy Prime Minister and Minister for Finance, At The Securities Investors Association Singapore (SIAS) 13th Investors' Choice Awards Ceremony and Annual Dinner

Taking Corporate Regulation Forward

1             Good evening. It is my pleasure to be here tonight at the 13^th Investors’ Choice Awards Ceremony, held in conjunction with the Corporate Governance Week programmes organised by SIAS.

2             Since its inception in June 1999, SIAS has been active in promoting good corporate governance and investor education. This is the third year of SIAS’ Corporate Governance Week, with a series of conferences and workshops to create greater awareness among listed companies and investors on the importance of good corporate governance practices. I would like to congratulate SIAS and its partners for your efforts and commitment to this series.

3             To this year’s winners of the Singapore Corporate Governance Awards and the Model Shareholder Award, I congratulate you too, for raising corporate governance standards and contributing to Singapore’s position as a leading business centre. You have also inspired many other companies and shareholders to raise the bar on corporate governance.

What Previous Changes in Corporate Regulation Have Meant

4             Singapore is committed to promoting high standards of good corporate governance among our companies. This includes periodically reviewing our laws to ensure that our regulatory regime remains robust, yet internationally competitive and relevant to the realities of our business environment.

5             There have been a few major developments in Singapore’s corporate governance regime over the last decade and a half. In the late 1990s, we made a significant shift in approach, from a merit-based regime of regulation, where the regulators sought to pre-judge the risks of investments, to a disclosure-based regime where the focus is on ensuring that investors have access to accurate and timely information, so that they can realistically take responsibility for their own decisions.

6             The shift to a disclosure-based regime is sometimes thought of as liberalisation. But it was not in substance a shift from more regulation to less. At its heart, the shift reflected recognition of an increasing diversity and complexity, both with respect to investment products and investors themselves. No merit-based regulator could spot all risks in advance. While the regulator could protect investors by keeping some risky products out of the market, there was equally moral hazard as investors would perceive that products that were allowed in the market were ‘safe’.

7             The shift to disclosure-based regulation was hence recognition of the reality that there were increasing limits to prescience and the ability of the regulator to protect investors. What we needed, paradoxically, was a broader and stronger set of rules on companies and financial intermediaries. Companies were subject to new requirements, and compliance with prescribed accounting standards was made a legal requirement in 2002. Companies faced strict penalties if they did not comply with accounting standards, and ensure that their accounts were true and fair. Professionals such as public accountants were subject to more stringent standards of business conduct. Financial intermediaries, such as financial advisors, were made responsible for assessing their clients’ investment profiles and needs.

8             To maintain investors’ confidence, the regulator was also given powers to take action and impose penalties swiftly and appropriately. In particular, the Monetary Authority of Singapore (MAS) was given the power to investigate and bring court action for market misconduct under a civil penalty regime that came into operation in 2004. The civil regime complements the criminal penalty regime administered by the Commercial Affairs Department. To date, MAS has pursued and taken action in various numerous cases of market misconduct, including insider trading and market manipulation.

9             A second important step forward was the introduction of the Code of Corporate Governance for listed companies in 2001. We did a second comprehensive review a decade on, and MAS issued a revised Code in May this year.

10          Thirdly, we made significant revisions to corporate legisla tion itself. The Companies Act was reviewed in 1999, and changes enacted between 2002 and 2004. The changes included abolishing the concept of par value and authorised share capital; allowing exempt private companies and dormant companies from statutory audit; allowing one-director private companies; and simplifying the process for amalgamation of companies.

11          These various shifts in corporate regulation have, together, raised the bar in corporate governance and market transparency. Singapore has indeed been privileged to be well-rated in surveys of both regulatory efficiency^[1] and standards of corporate governance^[2]. However, ensuring that our corporate regulatory environment remains competitive and robust is continuous work.

Improving Corporate Regulation

12          Since our last review of the Companies Act in 1999, a number of leading jurisdictions have undertaken reviews of their own corporate law framework. Australia redrafted its Corporations Act a decade ago. Other than simplifying the law to make it easier and more understandable for users, Australia sought to ensure that corporate regulation would be supportive of economic growth. The UK completed its company law reform in 2006. The new UK Companies Act made the rules more user-friendly for small companies. Hong Kong revised its Companies Ordinance in July this year, after a five-year review aimed at enhancing corporate governance and modernising the law.

13          In October 2007, MOF set up a Steering Committee led by Professor Walter Woon, and comprising other eminent and experienced members, to undertake a thorough review of the Companies Act. Our main objective was to reduce the regulatory burden on companies and provide for business flexibility, while protect the interests of investors where it really matters. The new corporate regulatory framework must retain a fair balance between the needs of business, including small companies, and those of investors.

14          The Steering Committee completed its work in April 2011 and submitted 217 recommendations to the government. MOF undertook a public consultation on these recommendations from June to October 2011. Given the extensiveness and complexity of the recommendations, MOF has taken time to carefully consider all the inputs received, clarify the thinking behind some of the respondents’ feedback. In evaluating views on each of the 217 recommendations, MOF has adopted a principled, but pragmatic approach. We have sought to balance the interests of the various stakeholders while not losing sight of the objective of achieving a competitive business environment, but one that preserves investors’ rights and interests where they really matter.

15          I am pleased to say that the Government has decided to accept most of the Steering Committee’s recommendations, and to modify some others. The full details of the Government’s response to the Steering Committee’s recommendations and a summary of feedback received are published on MOF’s website.

16          Tonight, I will highlight three changes that the amended Companies Act will bring when it is passed into law, which we expect will occur by the second half of next year. These three changes are of broad significance to both companies and investors.

(A)      Encourage broader shareholder activism by allowing multiple proxies

17          The first important move is to enable a wider group of shareholders, including Central Provident Fund (CPF) investors, to participate in companies. Shareholder activism is an important component of a healthy and well-functioning capital market. Put simply, it enhances corporate governance.

18          More can be done to enfranchise indirect investors who are the beneficial owners of shares. They should be given the same rights as direct investors to the extent possible. While the Code of Corporate Governance encourages listed companies to amend their articles of association to allow indirect investors to attend and vote at general meetings on a poll, few companies have done so. Thus, to allow indirect investors to participate in shareholders’ meeting, we will allow nominees and custodians to appoint more than two proxies each. Additionally, the multiple proxies will be given the right to vote on a show of hands in a shareholders’ meeting^[3]. In line with this change to a multiple proxies regime, we will allow CPF investors to attend shareholders’ meetings and vote on a show of hands or by poll, similar to other cash investors.

19          A large majority of respondents in MOF’s public consultation was in favour of this change. However, some companies have understandably expressed concerns about the logistical challenges of catering to the expected larger turnout at annual general meetings. To help companies better plan and manage, we will require a longer advance period for the filing of proxies prior to the shareholders’ meeting (extending the current timeline from 48 hours to 72 hours).

(B)      Reduce the Burden on Small Companies and Move Further Towards Risk-Based Corporate Regulation

20          The second major shift is to reduce the regulatory burden on small companies, and move further towards a risk-based approach to corporate regulation. I will highlight two recommendations in this area.

(I)            Introducing the small company concept for audit exemption

21          The first recommendation relates to the criteria for audit exemption. This is an important way in which we can reduce compliance costs for more of our small companies. We will introduce a small company concept, to replace the current criteria whereby a company is exempted from having its accounts audited only if it is an exempt private company (EPC) with annual revenue of $5 million or less.

22          As small companies have a smaller shareholder base and are of lesser public interest, there is no compelling need to mandate an audit of their accounts. Some small companies may choose to have their accounts audited for business needs, depending on the nature of their clients, creditors or shareholders. For simplicity, and to provide certainty to companies and their auditors, small companies will be defined on the basis of the same criteria being used for the current Singapore Financial Reporting Standards for Small Entities^[4].

23          We expect a further 10% or so, or about 25,000 more companies, to now benefit from this audit exemption. Existing safeguards will be retained, such as requiring all companies to keep proper accounting records and empowering shareholders with at least 5% voting rights to require a company to prepare audited accounts.

(II)          Allowing public companies to issue shares with different voting rights

24          A second recommendation with respect to a risk-based approach to regulation concerns the issue of allowing a dual class of shares, or tiered share structures. Many of you will recall the debate on the issue in the media last year. Some were concerned that having shares with different voting rights would undermine the rights of minority shareholders, compromise corporate governance standards and dilute trading existing shares. On the other hand, there are views that companies should be given more flexibility in raising capital, by being permited to issue shares with different voting rights . It also widens the range of investment opportunities, including for investors with different risk preferences and needs. Markets in the US, UK and Australia already allow classes of shares with different rights subject to companies’ articles, although Australia still restricts listed companies from doing so through its listing rules.

25          The concept of shares with no voting rights is in fact not new and private companies can already issue shares with different voting rights. Taking into consideration developments globally, as well as the demands of increasingly sophisticated investors, MOF will remove the one-share-one-vote restriction for public companies from the Companies Act.

26          Safeguards will be introduced to protect the rights of existing shareholders and ensure that investors are well informed. For example, we will require shareholders to approve the issuance of shares with different voting rights via a special resolution, and will continue to require that holders of non-voting shares have equal voting rights on resolutions to wind up the company.

27          The case of a dual class structure for listed companies is still being considered by th e regulators however. The Singapore Exchange, in consultation with MAS, is studying whether listed companies should be allowed to issue non-voting shares and shares with multiple votes, and if so, what safeguards should apply.

(C)      Improve Transparency for Better Corporate Governance

28          The third major set of shifts that we will make in company law involves stepping up disclosure requirements, as a means to achieve good corporate governance. I will highlight two important groups for which these enhanced disclosure requirements will apply - CEOs and company’s auditors.

(I)            Extending statutory duty on disclosure of conflict of interests to CEOs

29          In the modern corporate environment, the Chief Executive Officer (CEO) plays an influential role in decision making; sometimes more so than board directors. It is therefore important that we extend to CEOs the statutory duty to disclose conflict of interests in transactions and shareholdings in the company and related corporations. This statutory duty currently applies only to directors. This change is consistent with the approach already adopted for listed companies under the Securities and Futures Act.

(II)          Requiring auditors of public interest companies to obtain ACRA’s consent for premature resignation

30          Another important group is the auditors, whose role is to ensure that companies prepare true and fair financial statements that accurately reflect their business fundamentals. These financial statements are heavily relied upon by the company’s stakeholders, such as shareholders, bondholders and creditors, and sometimes even employees. It is therefore a cause for concern if a company’s auditor resigns before his term expires.

31          We will therefore require an auditor of public interest companies and their subsidiaries to seek ACRA’s consent for premature resignation. In addition, an auditor of these companies will be required to disclose its reasons for resigning. Examples of such public interest companies are companies listed on the Singapore Exchange, financial institutions, and large charities or institutions of public character. (This change does not cover the routine rotation of auditors.)

32          Besides raising standards in the interests of investors, this move will help companies and auditors - it will ensure that companies are not unfairly left in the lurch; it will also provide the auditor an avenue to resign especially in situations where the company refuses to hold a general meeting or appoint a new auditor.

Major Housekeeping Needed

33          I have highlighted the main changes that we are making to our corporate regulation landscape. The changes will facilitate broader shareholder participation, further improve disclosure, as well as reduce compliance costs for small companies.

34          Besides these policy changes, MOF agrees with the Steering Committee that it is time for major housekeeping. We have done 16 major revisions to the Companies Act since it was enacted in 1967, resulting in what is now a rather complex quilt. It is time to weave anew, and rewrite the Companies Act comprehensively to produce law that is clear, comprehensible and coherent. We will do so in two stages. The Companies Act will first be revised to implement the substantive changes arising from the recommendations of the Steering Committee. This will be followed by the cleaning up and re-writing of the Companies Act, in the couple of years after the changes have been implemented. MOF will of course seek public feedback on the drafting changes to the Companies Act early next year.

Conclusion

35          I thank the Steering Committee led by Prof Walter Woon for its comprehensive and thoughtful work. The changes we are making will contribute to keeping Singapore a pla ce where business can remain competitive and grow, where investors are fairly treated, and where citizens benefit from a dynamic and robust economy.

36          Many stakeholders from the industry, professional bodies, societies, academia and even individuals have participated actively in the review of corporate regulation. SIAS has itself provided valuable feedback as part of the public consultation. The inputs that we have received have helped us to make the recommendations more robust and practical, and I thank everyone for their time and contributions.

37          In conclusion, I would like to commend SIAS for the good work done in supporting Singapore’s retail investors and for being a strong and indefatigable advocate for best practices in corporate governance. My congratulations once again to tonight’s award winners, for the leadership you have shown.

38          Thank you very much and I wish everyone a pleasant evening.

^[1] Singapore was top-ranked in a 2012 study by the World Bank, Doing Business 2012.

^[2] Singapore was ranked at the top of the latest Corporate Governance Watch 2012 report, recently published by the CLSA Asia-Pacific Markets and the Asian Corporate Governance Association.

^[3] Hong Kong and the UK have put in place broadly similar provisions in their Companies Act.

^[4] A small company will be defined as a private company that meets two out of the following three criteria:

(a)     total annual revenue of not more than S$10million;

(b)     total gross assets of not more than S$10million;

(c)     number of employees of not more than 50.