Dual class shares: another really bad idea

Both the SGX and Bursa seem to contemplate allowing companies to list with a dual class share structure. That sounds like a really bad idea.

Luckily quite a few parties have spoken out against it, for instance:

• Business Times
• Mak Yuen Teen
• MSWG ("is Malaysia ready for dual-class shares" in The Edge Malaysia)
• Abderdeen

David Webb wrote about the same issues in the Hong Kong context.

The arguments in favour of a single class of shares are rather obvious: a simple, clear structure, which has been proven in time. With enforcement that is not "that great", a lack of shareholders activism in both countries, at least (in some rare cases), minority shareholders do have a chance.

What are the arguments of the people supporting a dual class share structure? They are often rather "vague", for instance:

• "The envisaged dual-class share structure listing framework is intended to enhance SGX’s attractiveness as a listing venue and to broaden and deepen Singapore’s capital market" (article)
• "This is about SGX and the Singapore authorities realising that tech companies need a space where they are safe and able to grow, at every stage of their development" (article)
• "The approval of the dual-class share structure in Singapore has shown our Garden City to be a progressive financial hub and might help bring in more listings here in the future." (article)
• ".... founders of companies often have a longer term vision in mind compared to investors who tend to be more focused on short-term gains. The structure hence, protects the founders against short-term pressure for returns" (article)

The argument about tech companies is really strange. Most tech companies will raise money from VC (Venture Capital) firms before they list on an exchange. The VCs will invest their money in exchange for shares, not the normal shares, but (rather ironically) preferred shares which will have much more rights attached than the founders, not less.

For instance they are entitled to a "liquidation preference", besides that they often have a veto right over corporate restructuring, sometimes they even have the right to fire the founders and/or push a deal through which they like and the fouders not.

Founders still accept those deals, because the money is good. So much for the "short-term pressure for returns" argument.

The other argument about attracting companies from outside: the regulators should ask themselves how far their enforcement reaches in case of a dispute, especially considering the many "failures" of China based companies on the SGX and Bursa. If you can't enforce, then there is no deterrent, the exchange will attract the wrong kind of people and fraud will happen.

I hope both exchanges will not introduce a dual class share structure. If founders really have a problem with the "one share, one vote" rule, they simply should not take outside money.

Serious CG issues at SingPost (2)

The one person who wrote a lot about CG issues concerning SingPost is Mak Yuen Teen.

Many of his letters can be found in the "letters" department in the local newspapers. They can also be found on Mak's website.

The articles and letters concerning SingPost can be found here.

One rather remarkable aspect is that this is not the first disclosure lapse by SingPost, as detailed here, some snippets:


The group’s recent admission of disclosure failure may remind some observers of what transpired with ACCS 10 years ago. SingPost had announced its intention to invest in ACCS in early March 2005, after ACCS shocked the market by saying that it had lost almost all its Nokia contracts, had overstated its earnings, and was under CAD investigation.

Soon after, the deal came under intense scrutiny when it was disclosed that three SingPost directors – Mr Goh, Mr Lim and Tan Yam Pin – held stakes in ACCS.

Mr Goh, who had failed to disclose his substantial stake in ACCS, blamed “inadvertence”. Mr Lim revealed that he had bought shares in ACCS after it announced the Nokia contract losses, and that he stopped buying just days before talks on the planned investment started.

A bombshell came when SingPost and Mr Lim said in late March 2005 that they were helping in a CAD probe, triggering speculation that this was linked to Mr Lim’s purchase of ACCS stock. However, this was not confirmed. The CAD cleared Mr Lim of any wrongdoing a few months later, in October 2005.


It appears SingPost, despite the above negative experience, has not put proper processes in place to deal with acquisitions where directors seem to have a conflict of interest.

More credible responses needed from S'pore firms accused of bribery abroad

Timely article from Mak Yuen Teen in the Business Times (Singapore). Some snippets:


..... allegations have been made in media reports about the possible involvement of some Singapore companies in bribery scandals overseas. The responses from these companies typically include an immediate denial of the allegations, and an assertion that the company has zero tolerance for corruption and a code of conduct prohibiting bribery and corruption.

.... every company will undoubtedly say it has a zero tolerance for corruption. I have never seen a company say it has some tolerance for corruption.

.... most companies have a code of conduct that prohibits bribery and corruption, and certainly none will have one that condones it. This does not guarantee that employees or third parties may not have violated the code.

In a recent case, overseas media reports said a leaked confidential memo from an overseas company accused of being a middleman in a massive bribery scandal commented that the Singapore company that was allegedly involved was an "ideal client" because it had lax anti-corruption controls, relative to other multinational clients.

[this is most likely a reference to Keppel, as described here]

Singapore companies that do business overseas need to take a good hard look at their compliance programmes, strategies, incentive systems and business practices and adopt a more measured approach when responding to bribery allegations. Rather than issuing a knee-jerk outright denial, chanting "zero tolerance for corruption" and "code of conduct" whenever such allegations surface, they should take allegations seriously and commit to reviewing their compliance programmes and undertaking their own investigations. Outright denial of bribery without any specific action may give the impression that the company has a head-in-the-sand attitude towards actual bribery risks out in the field. If the allegations subsequently turn out to be true, the company's initial response would be seen to be shallow and, over time, the company will lose its credibility.

Non-independent directors suddenly becoming "independent"

Great article by Mak Yuen Teen in the Business Times (Singapore). Very relevant to the situation in Malaysia also where the same practices happen.


Some snippets:




.... "the lack of independence of independent directors here is such an intractable issue that there's little hope of any improvement".


Recently, there was a company that redesignated a non-independent director to an independent director. This director had served on the board for 11 years as a non-independent director, including three years as a non-independent chairman. Unlike the more typical situation of directors being redesignated from independent to non-independent after nine years, this director was re-designated from non-independent to independent after 11 years. This is like someone who was not a virgin and then became one.


.... I have developed a form that asks directors to declare all payments and services and to provide details of these payments and services. I also include a question that asks directors to declare "any other relationships or arrangements" with the company, its related corporations, its key officers and major shareholders. This puts the onus on an independent director to declare, for example, that he has been the regular golfing partner of the CEO over the last 20 years.


Until we allow non-controlling shareholders more say in the nomination and election of directors or the determination of their independence, this search will continue to prove to be elusive.

Shareholders can query external auditors at general meetings

The issue if shareholders can ask questions to the external auditors was raised in the (rather heated, but very interesting from a corporate governance point of view) debate in Singapore regarding Noble Group.

Mak Yuen Teen wrote a clear answer to that matter in the Business Times (Singapore). Some snippets:


External auditors are appointed by shareholders, their report is addressed to shareholders, and they have a fiduciary relationship with them. It would be odd if shareholders appoint external auditors who report to them, but cannot ask questions about how they did the work.

.....  there is not much point in having external auditors present at general meetings - and companies being charged for it - just for them to issue boilerplate responses.

For example, shareholders at the Noble AGM could have asked questions about how the external auditors arrived at their audit opinion, the appropriateness of the accounting policies and assumptions used by the company, and how they audited the investments in associate companies such as Yancoal and biological assets.

As a matter of decorum, shareholders should direct their questions about the external audit or about other matters through the chairman of the meeting. The chairman should provide the opportunity for the external auditors, committee chairmen and others to answer these questions as appropriate.


To all readers who visit AGMs/EGMs and have questions regarding accounting matters, please feel free to follow the above advice. I assume the rules are the same in Malaysia.

On a side note: I hope to have time in the future to comment on Noble, which might also be worthwhile in the Malaysian context: although no company on Bursa has yet been targeted by a "shortseller", one day that surely will happen, better to be prepared for it, both for regulators and companies.

Independent directors: use different approach

I have highlighted several times the issue of independent directors, not speaking up for the minority investors (for instance in the case of related party transactions), not trying to unlock value in a company (for instance in the case of privatisation), not voting down (relatively) high wages for the management, etc.

Mak Yuen Teen wrote a letter to The Business Times (Singapore) "Independent directors: use different approach", which is also relevant in the Malaysian context. Some snippets:


.... The question I posed was in response to a discussion about the "nine-year" guideline on independent directors in the 2012 Code of Corporate Governance, under which the independence of directors should be subjected to a "particularly rigorous review" after nine years. In addition to the lack of clear guidance on how a "particularly rigorous review" is to be conducted, I was concerned about relying solely on the nominating committee or the board to determine if a director who has served beyond nine years should continue to be considered to be independent. This is because of the inherent conflict faced by the nominating committee and the board in this.

In fact, the nominating committee and the board are also conflicted in the initial and ongoing assessment of independence of directors, and in other issues such as recommending board appointments and re- election/retirement of directors. In the case of the latter issues, a check-and-balance is having shareholders vote on the election or re-election of directors.

In countries such as Malaysia and Hong Kong, the code of corporate governance recommends that the independence of directors should be subject to a separate shareholders' vote after nine years. If shareholders vote against the independence of the directors in this separate vote, then the company can still choose to retain the director as a non-executive director, but should not label him as an independent director. Alternatively, the board can just redesignate the director as a non-independent, non-executive director, without seeking a shareholders' vote.

At the forum, I had expressed doubt about whether such a shareholders' vote would be effective, if all shareholders get to vote on the continuing independence of the directors after nine years. After all, those who are familiar with our corporate landscape would know that there are many independent directors who have an inter-dependent relationship with controlling shareholders. If the vote is to be meaningful, then controlling shareholders should not vote.

David Webb said about this subject:


Another key issue in Asia is the lack of truly independent directors. "You have tycoons appointing their cronies and golf buddies as ‘independent directors'," notes Webb.

"There are very few really independent directors in Asia who are not tied to management or owners and who are willing to ask difficult questions," he says. "It is important that independent directors be elected by minority shareholders, with controlling shareholders forced to abstain from voting."

He adds that independent directors should be answerable to minority shareholders; so, if they fail to do a decent job, they can be quickly replaced.

SGX: twice "attacked" in the press

Today the SGX was twice "attacked" in the Business Times (Singapore):

SGX site is now counter-intuitive

Some snippets:

... The most baffling, unannounced change concerns real estate investment trusts (Reits) and business trusts. Previously, someone who wanted to search for the announcements made by, say, Cache Logistics Trust, could go directly to the "company disclosure" section and search immediately for the name of the company. Now, one can only access the information after identifying and searching for the name of the company managing the Reit or trust, which can sometimes be very different.

...... Moreover, the new layout is a design disaster.

The main focus of the page no longer seems to be on the company announcements themselves, but on two large columns devoted to company names and security names. The titles of the actual announcements themselves - which can be significant corporate events like contract wins, debt listings, mergers and acquisitions and financial results - are squished into one tiny column on the right.

..... Mr Webb, by the way, has a great webpage with a formidable database on directors and companies, which he built through the years with just one other person. SGX, with all its resources, can do better here.


In my opinion, Bursa Malaysia has an excellent website regarding the company announcements and thus appears to be doing much better than the SGX. A few things could be improved though:

• When a company changes its name (which does quite often happen), one can only find the old information under the new name. For instance, information regarding "Woo Hing Brothers" is to be found under "Kamdar Group", the 12th page and further.
• Enforcement actions are stored (or rather, hidden) under "Media". There should be an easier way to find all enforcement related news sorted by date or company, combined with those of the Securities Commission.
• I love long term charts, it would be good if Bursa can give the price charts over more than 5 years.
• A database of companies and directors, similar as done by David Webb.

But other than this, an excellent announcements website, that can compete with the best.


The second article regarding SGX is from Mak Yuen Teen:

SGX should be more proactive against potential insider trading

Last week was not a good week for the regulatory side of SGX. On the one hand, it was criticised for not querying Olam, while on the other, it was told that it was too easy on the trigger for "Trade with Caution" (TWC) alerts.

There is a role for TWC alerts, particularly for issuers which have unusual trading activities and which cannot explain them when queried by SGX. From our research, about three-quarters of responses to price queries say that they could not explain the price run-up or decline. SGX should focus on these companies when issuing TWC alerts, rather than companies which have attempted to explain the unusual trading activities. This is not to say that SGX should never issue TWC alerts in other cases but it should be more circumspect in doing so. Otherwise, over time, such alerts may cease to serve any useful purpose and we may then see a new alert in the form of Trade with Extreme Caution to differentiate it from Trade with Caution.

I appreciate that SGX is enhancing its regulatory role and the increase in its surveillance activities should be applauded. However, SGX and other regulators should recognise that surveillance is only part of the system of monitoring and enforcement.

In the case of the 75 per cent of issuers which say that they have no explanation for unusual trading activities, do the regulators track whether these issuers announce significant corporate developments soon after they issue their "no explanation" responses? Do they investigate whether the prior unusual trading activities were the result of leakage of information about these developments?

Olam, which was not queried, is far from being the only stock that has experienced significant price movements before a major corporate announcement. The issue should not primarily be about whether an issuer is queried, but whether there are unusual price or volume movements before major corporate announcements which may indicate possible insider trading. Some markets, such as the US, focus on investigations and enforcement rather than queries and public disclosure around these queries.

SGX and other regulators should examine the balance between surveillance and enforcement and ensure that sufficient resources are put into investigations and enforcement. This may require the government to review the resources allocated to agencies and units which are responsible for investigating and prosecuting capital market-related offences. Surveillance and enforcement need to go hand in hand and it is well accepted that the key to a robust capital market is effective enforcement. If enforcement is improved, we may also see a decline in the need to issue queries and TWC alerts over time as unusual trading activities may become less common.


This article is unfortunately very relevant for Bursa Malaysia, both regarding possible insider trading (which I think is a real problem in the Malaysian market), and regarding the last paragraph (resources allocated to enforcement).