Does Singapore need a corporate sling?

Singapore, once the byword for exemplary corporate governance, has experienced an uncharacteristic spate of business controversy over the past eighteen months. Jake Lloyd-Smith reports on the steps being taken to remedy its reputation and steer a much smoother course through 2006

For better or worse, economies have reputations, just like the individual companies that make them up. Fast-growing India is popularly seen as still burdened by a maze of rules but is now liberalising at breakneck pace; Malaysia was once a byword for cronyism but has latterly done much to clean up its act; and Indonesia is often associated with widespread corruption, bureaucratic inefficiency and squandered opportunity.

Had you asked most people involved in global business what name Singapore has made for itself over the years, the answer would likely have been that the city-state is among Asia’s best-run countries - at least for its businessmen. Decades of assiduous rule-making by People’s Action Party administrations, whose leading lights rail against the taint of corruption, have helped to create a stable environment where corporate shenanigans were delightfully rare. Corporate Singapore was run by the book, or so went conventional wisdom.

But then came the remarkable events of the past 18 months. First China Aviation Oil, a local subsidiary of a powerful mainland energy importer, admitted at the tail end of 2004 that it was facing ruin after running up vast losses trading derivatives. An independent probe ordered by the stock exchange pointed to woeful internal failings, and a slew of its senior executives are now facing charges of serial corporate malfeasance.

As the CAO affair unfolded, there followed a rash of other Singapore scandals. Citiraya Industries, which recycles electronics waste, was probed for fraud. Some of its creditors cried foul and have sued. Mobile phone repair company Accord Customer Care Solutions then hit the headlines with news that its financial records for several years would need to be restated. Senior executives have resigned, and some face almost 100 charges of cooking the books.

Less well-known, insider trading charges rattled listed disk drive parts maker, Brilliant Manufacturing and, separately, Amtek Engineering. Rounding out the grim picture there was a debilitating scandal at the National Kidney Foundation. The group, Singapore’s largest charity, may not be a company, but its problems - principally a lack of disclosure - carried strong echoes of what appeared to be happening in parts of the private sector.

The deluge has prompted a good deal of soul searching in financial circles. “The recent spate of high-profile cases… has resulted in calls for Singapore to step back and review our current corporate governance structure,” Khoo Boon Hui, Singapore’s Commissioner of Police said at a packed gathering of financial experts, white-collar crime experts and accountants.

Among the questions that have been exercising minds are: is the Lion City losing its previously sure touch when it comes to corporate governance? Are the scandals reflective of unsuspected lax standards? And do the authorities, company directors and the accounting profession need to do more?

For some, the recent run of bad news has not yet set off alarm bells as the individual cases are seen as just that, individual. “So far, it is isolated cases - unfortunately, there have been several of them over the last one-and-a-half years. I don’t think that it is a systemic problem,” says Seah Hiang Hong, head of research at Kim Eng Securities. “I think that rules alone are not sufficient to prevent instances like Citiraya and ACCS.”

Adds Gautam Banerjee, executive chairman at PricewaterhouseCoopers Singapore: “Like other countries, we’ve had our fair share of issues, and the fact that you have good governance and good laws doesn’t prevent companies from taking risks… Singapore is also somewhere where things get into the public eye quickly. The authorities are such that they’ll make sure there’s an investigation.”

Aside from ongoing investigations, the rule-makers have also fired a double-blast to try to remedy any possible failings. The first and most significant step is a slew of proposed amendments to the listing regulations announced by SGX, the company that runs the stock exchange. Among the new provisions would be a requirement that boards give a half-yearly “negative assurance” that nothing has come to their attention that may subsequently render the numbers incorrect. This and other changes, however, have yet to receive the stamp of approval from the Monetary Authority of Singapore (MAS) and actually come into effect.

The second shot came from the Government itself, which agreed to a number of changes to the country’s voluntary Code of Corporate Governance (CAPS CORR). The tighter advisory rules were drawn up by a specialist committee that had been tasked with delivering the update to the Code in mid-2004 - that’s before China Aviation hit the headlines.

Among the highlights was expanding the role allotted to a company’s audit committee to include reviewing and ensuring the integrity of a group’s financial statements. There was also an intriguing suggestion that companies put in place arrangements so that their own staff can blow the whistle if they suspect serious wrongdoing. This proposal, described by MAS managing director, Heng Swee Keat, as “very positive”, has already been taken up by some high profile groups including Singapore Airlines. These new provisions - which are not legally binding - won’t come into effect until 2007.

Encouraging

David Gerald, the head of the Securities Investors Association of Singapore, which looks out for 60,000+ small-time investors, says it has been a very tough year but recent trends have, on the whole, been encouraging. “The retail investors now understand that we have to be careful about where we invest and how we invest,” says Gerald, who has led calls for getting to the root of CAO’s woes.

“Going forward, it does augur well for Singapore that most corporations are very keen to get their act together,” says Gerald. “Most the companies - there are 650 companies listed here - are OK: just four or five are in trouble… We retail investors in Singapore are also very happy that the policing is excellent.”

Not everyone is quite so sanguine. Jamie Allen, secretary-general of the Hong Kong based Asian Corporate Governance Association, says that while Singapore still fares favourably when compared with regional neighbours, the authorities could still do more. He points in particular to the Government’s key recent rejection of a proposal to tighten up the definition of what constitutes an “independent” director.

While the committee that reviewed the Code argued that the rules should be tweaked to exclude those who were associated with a company’s major shareholders, the Government said “no”. “The more that we talk to directors in Singapore, the more it appears that a lot of those directors are not pulling their weight; they are not putting in the time required,” says Allen, adding: “A lot of the independent directors are not as independent as you would expect.”

There are also words of caution on this issue from PwC’s Banerjee. “A lot of our independent directors, internal auditors perhaps - in terms of actually doing their work - could be much more thorough.”

But, for now, most financial experts are looking at the bigger picture, waiting to see whether 2006 proves to be as rocky a road for Singapore’s corporate sector as last year turned out to be. “Accountants have a role to play definitely,” continues Banerjee. “A lot of my colleagues say that every 10 years we have a major collapse… This decade we hope it is China Aviation, and there’s not another one coming.”

Jake Lloyd-Smith is a freelance journalist based in Singapore. He works regularly for the Financial Times, TIME Magazine and the London Evening Standard.